France, Germany clash over EADS-BAE headquarters: sources

France and Germany have collided over the location of the headquarters for a new aerospace giant to be formed from a planned merger of Europe's EADS and Britain's BAE Systems , sources familiar with the matter said on Tuesday.

France wants the group's headquarters to be based in Toulouse, its southwestern aerospace capital where the Airbus planemaking subsidiary of EADS is based, but Germany is pressing for the group to be headquartered outside Munich, they said.

The apparently incompatible demands constitute one of the hurdles that must be addressed in tough negotiations now getting under way in private, after a very public war of words about the creation of a new global defense group broke out on Monday.

Shareholders, executives and politicians have clashed over the 60:40 merger ratio in favor of EADS, state participation and now a behind-the-scenes battle over the headquarters as talks go down to the wire ahead of an October 10 deadline.

"This is just the start; everyone pitches for the maximum they can get and then you have negotiations," said a source close to talks between firms, governments and key shareholders.

UK arms firm BAE Systems and EADS, controlled by public and private interests in France and Germany with Spain as a junior partner, are in talks to create Europe's answer to U.S. aerospace giant Boeing with a value of $45 billion.

The squabbling over headquarters - echoing lobbying between countries for the right to host international organizations - has emerged as a sensitive issue of national pride as Germany fights to retain its standing in one of its flagship projects.

EADS was created from a merger in 2000 and quickly became a further symbol of Franco-German integration alongside the euro, but within half a decade it had become the focus of industrial tensions between the two main euro zone economies.

BALANCE OF INTERESTS

Now analysts say Germany fears being left as a junior partner in a company steered mainly by French and British interests, starving it of future investment and aligning Europe's defense industry with its two largest military powers.

While a consensus has taken hold that the combined defense operations of the new group would be in London and its commercial aerospace heart would remain in Toulouse, the prestigious headquarters are seen as a prize worth fighting for.

Berlin has presented a demand that the group headquarters should be in Germany to preserve a balance of interests between the three main host nations, the sources said.

Chancellor Angela Merkel's Bavarian CSU partners specifically want the corporate base to be placed in Ottobrunn near Munich, though they remain minority coalition members.

Sources close to the talks said earlier France was backing Toulouse as part of its conditions for agreeing to the deal.

The German request is likely to be opposed by EADS, whose chief executive Tom Enders established the de facto headquarters in Toulouse on taking office just three months ago.

EADS and BAE also want to minimize outside interference in decisions they regard as a matter for the new company's board.

EADS declined to comment.

The impasse stems from government concerns over retaining jobs during hard times for Europe's economy as well as coveted technology needed to drive growth.

INVESTOR CONCERNS

The moves also threaten efforts to remove duplication from legacy EADS operations and are likely to draw protest from investors concerned about scant cost-savings offered by the merger.

Until June this year, EADS had its headquarters in both Paris and Munich as a result of power-sharing agreements put in place when EADS was set up. Staff in Munich are said to be particularly concerned about jobs as a result of the merger.

With a deadline of October 10 for a deal approaching, EADS and BAE are also trying to reach agreement with European governments on jobs and research investment while trying to woo skeptical investors.

In remarks to an audience of engineers in London on Monday, Enders said job cuts were not the main purpose of the merger, which was based on expectations of growth.

"This will not go down in history as the deal with the most cost synergies," he said.

He said if people are wondering whether the deal would involve "slashing" jobs, he said: "That's not the purpose."

The merger plan, affecting jobs, security and prestige in Europe's most powerful industrial economies, has spawned negative leaks and rhetoric from all sides.

Germany's defense minister warned on Monday that the war of words could kill the proposal, which has also been greeted skeptically by financial markets.

EADS and BAE shares rose 2-3 percent on Tuesday, clawing back a small proportion of losses since talks became public.

The merger plan, however, won a vote of confidence from one of the industry's harshest critics, the chief executive of Qatar Airways who has frequently berated Airbus and Boeing over development delays and design decisions.

Noting that the merger would re-unite Airbus and BAE, Akbar Al Baker said: "It will make them strong".

BAE sold a 20 percent stake in Airbus in 2006. Since then commercial jet sales have soared and defense has stagnated.

"They're coming back together because staying apart was not in their best interest. They can provide better products and customer service together," Al Baker told reporters in Doha.

(Additional reporting by Sophie Sassard, Jason Neely, editing by Peter Millership)