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Unless certain conditions are met, the merger of BAE and EADS will not happen.
There is concern on the parts of the BAE and both the US and British governments that the shareholdings and rights of governments involved in the proposed merger must be limited.
Defense Secretary Philip Hammond said, “It is not, I think, necessary to have no French or German interest in the company. It is (emphasis ours) necessary to reduce that stake below the level at which it can control or direct the way the company acts. We want to see this company – and I think the management wants to see this company – prospering as a commercial business focused on doing the things that are right for the business, not being beholden to or controlled by any one government.”
Experts agree that the US regulators will not accept any government ownership in the company exceeding 9.9%, citing that as what has been generally acceptable in the past. Anything exceeding that percentage would likely lead for the US, and quite possibly the UK, to insist on certain divestitures and/or creation of “a more restrictive proxy board.” BAE has already made known that it would not fancy those terms and that, if they were imposed, they would abandon the merger.
“That has been a BAE red line from day one,” one spokesperson said. “If the Department of Defense forces us to cross a point where there’s going to be a divestiture or a proxy or something like that, that’s the end of the transaction.”
Exacerbating the situation, shareholders they are becoming “frustrated by ongoing political battles between the three governments who will have to sign off the merger – the UK, France and Germany” and because information on the negotiations does not seem to be forthcoming in a timely or open manner.
Forty-five ministers of parliament have sent a letter to Prime Minister Cameron requesting that he veto the £28 billion merger. The UK holds a so-called “golden share” in BAE, allowing it the right to singularly halt the deal with its veto. Hammond said, “We have made very clear that we do have red lines around the BAE-EADS merger and that if they can’t be satisfied, then we will use our special share to veto the deal.”
Although both BAE and EADS receive high marks from US security officials, a US government clearly want to take a much closer look at the merger that will result in the world’s largest aerospace company and the sixth-largest contractor for the US Department of Defense. Security arrangements with defense contractors are complicated and require such things as that “all communications with the parent company to be logged, and visits by officials from the parent company to be approved in advance.” Therefore, even with the approval of the European governments, US approval could takes weeks.
At the crux of the US issue is a concern of granting access to sensitive US weapons technology to a non-US company.
In addition, in talks over the weekend, the German government is threatening to scrap the merger unless the parent company is based in Munich. Reports early Sunday afternoon indicate that France and Germany are conceding to 9% shares in the new company.
BAE shares dropped sharply on Friday afternoon, closing at 328.00 after having reached 363.00 on September 12.
