Spotlight on Germany as EADS, BAE inch towards deal

EADS and BAE Systems have edged closer towards winning political backing for a $45 billion merger to create the world's biggest arms group amid positive signals from Britain and France, but German misgivings over control is a big obstacle, sources close to the talks said.

A number of potential stumbling blocks have emerged since the proposed tie-up between the Airbus manufacturer and the British defence group was announced last month. These include conflicting political interests in Britain, France and Germany, as well as some shareholders' dissatisfaction with the terms.

Negotiators are sticking to a British regulatory deadline of Oct. 10 to keep up pressure for a face-saving deal squaring German demands for equal treatment to France, which would have a government stake, with company opposition to outside influence.

But the door has been left open to a 1-2 week delay if the talks show enough progress, according to dates circulated for possible internal union briefings on the deal. "We are working towards Oct. 10," a person familiar with the EADS position said.

Two sources familiar with the talks said next Wednesday's deadline, imposed by UK regulators, was optimistic but that the companies would not release pressure for a deal by asking for an extension without a decisive step forward in the talks.

The wait means another frustrating weekend for minority investors who have demanded details of the proposal to create an aerospace and arms company to rival the U.S. giants.

"As far as we are concerned, there's been no attempt to explain the rationale for the deal to investors," said Barry Norris of Argonaut Capital Partners, an EADS investor. "This is one of the worst ever proposed mergers I have ever seen."

Shares in both companies edged 1 percent higher. EADS is 12 percent below its level before talks became public last month.

"I am somewhat reluctant to let it go at the current levels," said one of the top 40 EADS investors, who declined to be named, adding:

"If it does go through I will be disappointed because I wanted to own EADS for its significant earnings stream in civil aerospace which was improving markedly ... If the deal goes through I get that earnings stream diluted by a lower, if not negative, growth defence business."

GERMANY HOLDS OUT

Germany is holding out for the same role as France, which would hold 9 percent in the new group, and wants to host the headquarters. This has put it at odds with EADS, which wants minimum political interference.

Germany's demand would entail Berlin buying a stake in EADS currently owned by carmaker Daimler. But EADS chief Tom Enders continued to rebuff the idea which also worries UK officials anxious to prevent damage to BAE's vital, but sensitive, U.S. defence markets.

Britain, France and Germany held "reasonably constructive" talks at official level, a person familiar with the matter said, but securing a deal in time for an Oct. 10 deadline looks increasingly likely to need a push from European leaders.

"Britain and France have moved further forward (towards accepting the deal); Germany's position has not changed," a person familiar with the negotiations said.

Talks between Germany and EADS itself are at a standstill while the three affected nations discuss a political response.

A French parliamentary source briefed on the negotiations said that France, Britain, EADS and BAE are now agreed on the deal's basics, but Germany still had to be convinced.

"The decision is now at the highest level. It may be settled between (French President Francois) Hollande and (German Chancellor Angela) Merkel," the source said. "Hollande is ready to call Merkel if needed."

The two leaders held inconclusive talks on Sept. 22.

While Berlin is widely portrayed as isolated, German sources insist it is France's determination to keep a state shareholding and a major headquarters, undervaluing Germany's role in EADS and European defence, that has led to the impasse.

"It is a complex and sensitive process and these are not issues that are easily sorted out with side deals in the corridors," a source involved in the talks said.

"Everyone is trying to inch forward to a position of comfort on this (point), but you can expect a few convulsions along the way," said another person involved in negotiations. "You don't want a situation where governments feel that if more shares become available, they can go ahead and buy them."

The three nations are also negotiating National Security Agreements in addition to anti-takeover golden shares.

EADS is controlled by a pact between the French state and two core industrial shareholders, Lagardere and German carmaker Daimler, which collectively own 45 percent.