Wrangling halts BAE-EADS tie-up

Πηγή: FT
By Carola Hoyos, Anousha Sakoui, Peter Marsh and James Boxell
Oct 10 2012

Diplomatic efforts to secure the most ambitious defence and aerospace deal of the decade have broken down under the weight of political opposition from Berlin and Paris, people close to the discussions said.

“It’s all looking very negative. The governments have not been able to give us what we want,” said one person close to the companies.

However, neither EADS nor BAE Systems confirmed that they had given up their efforts to forge their €34bn tie-up. They still have several hours before the deadline to agree a deal or seek an extension to their deadline from the UK Takeover Panel.

Two people close to the companies said on Wednesday it was looking unlikely that the two companies would continue negotiations on the deal, and were preparing to announce the end of talks unless there was a last minute move by the Germany, which has been opposed to the planned tie-up.

One of these people said it was more than just an issue over stakeholdings, but that German officials had an “I don’t like it” attitude towards the proposed combination.

Diplomats believe Angela Merkel, German chancellor, is uncomfortable taking a large stake in a company with such a large defence portfolio. Mrs Merkel faces elections next year.

However the people said that there could still be a last-minute extension if there was a “dramatic last minute change by the Germans”. “If the game was up, we would have updated the market,” one of the people said.

Investors on both sides were also unhappy about the potential tie-up, adding pressure to the negotiations.

The collapse of the proposed deal would leave the management team of BAE especially exposed. Ian King, chief executive, and Dick Oliver, chairman, spent the past three weeks briefing investors on the merits of the deal, but faced stiff opposition, including from Invesco Perpetual, which owns 13.3 per cent of the company.

The executives’ willingness to do the deal – which gave many the impression BAE had little other way of achieving short and medium-term growth in a declining western defence market – could lead to a possible break-up of BAE or a takeover by a large US defence contractor, analysts said.

But both those possible outcomes would face hurdles, not least the opposition of the US and UK governments. Several analysts, defence executives, investors and government officials have noted the most likely short-term effect of the collapse of the deal would be to force a change in BAE’s management to one that could better articulate a future strategic direction for the company.

In early afternoon trading, BAE shares were down almost 1 per cent at 322.4p while EADS shares were 0.3 per cent higher at €26.19.

BAE ready to quit deal if US ties at risk

Πηγή: FT
By Carola Hoyos in London and David Gelles
Sept 23 2012

BAE Systems has warned it will walk away from its proposed €35bn tie-up with EADS if the deal waters down its special relationship with the Pentagon.

“BAE will not do this deal if its Special Security Arrangement has to change to look more like that of EADS,” said one person close to BAE, in a sign of the complexities surrounding one of Europe’s largest and most sensitive industrial mergers in years.

This SSA, specifies that BAE’s senior leadership in the US is made up of Americans, among other things, and has allowed the UK’s biggest defence company to work on many lucrative US national security projects.

These include the $1,500bn F-35 joint strike fighter programme to develop the most advanced radar-evading jet fighter.

EADS also has an SSA, but it is stricter than BAE’s and means it has to ringfence sensitive projects so they are run by an American-led proxy company that releases minimal financial information to the parent company and forbids day-to-day control.

BAE’s arrangement has allowed it to grow into the largest and most trusted foreign military supplier in the US, where it makes $14bn in revenue and employs 40,000 people in about 40 states.

That makes it attractive to Franco-German EADS, which has been a less successful supplier employing about 3,000 people in a US business with revenues of $1.4bn.

BAE’s insistence that it does not want to change its SSA could prove problematic.

Several lawyers close to the US approval process believe Washington will not allow BAE to keep its more generous SSA if it merges with EADS, in which both France and Germany have either a direct or indirect stake.

A major sticking point is the concern that France could maintain a share of the new unified company even if it gives up its day-to-day influence – a step envisioned by Tom Enders, EADS chief executive.

“The [US] military would rather have a BAE than a combined BAE-EADS. BAE has been very successful in managing its US relationship. EADS is not in the same bucket, and a combined EADS-BAE is going to be treated a lot more like EADS than BAE,” says one lawyer who works on cases that go before the Committee on Foreign Investment in the United States (Cfius), which scrutinises the national security implications of foreign deals.

Europe’s largest aerospace company and its biggest defence contractor are in discussions over a potential merger that would create a rival to Boeing

He believes the deal could pass US hurdles, but not without sacrifice on BAE’s part. “If they’re willing to submit to tighter controls than BAE had, they might be able to get a deal done.”

Under the planned merger, EADS, the owner of Airbus, would end up controlling 60 per cent of a new global aerospace and defence group big enough to rival Boeing of the US, while BAE would have 40 per cent.

The deal is still being examined by the three governments most closely involved in the UK, Germany and France.

Both Berlin and Paris have either a direct or indirect stake in EADS, while the UK has a so-called “golden share” in BAE that means it can block a deal on national security grounds.

UK prime minister, David Cameron, is broadly supportive of a deal he thinks can benefit the British economy.

Angela Merkel, German chancellor, and François Hollande, France’s president, discussed the proposed merger at a meeting in Ludwigsburg, southern Germany, on Saturday, but did not reach any decisive conclusions.

Mr Hollande said both governments were seeking conditions covering “jobs, industrial strategy, defence activities, and our respective national interests”.

Officials expect discussions to intensify among the three governments in the coming days.

BAE puts conditions on EADS talks

Πηγή: FT
By Carola Hoyos, Andrew Parker and David Oakley
Sept 13 2012

BAE Systems has warned EADS that it will walk away from merger talks unless the combined European champion in aerospace and defence was allowed to operate as a normal company without political interference.

BAE is also insisting that the combined entity’s defence business would have to be based in the UK if the plan, news of which was leaked on Wednesday before the structure was finalised, is to go ahead.

The management of EADS has indicated it would be willing to de-politicise the company, but it remains far from certain that Paris, in particular, and Berlin would agree to give up their strategic stakes.

The uncertainty over the fate of the deal as well as the lack of clarity on possible cost-savings and strategy prompted deep investor scepticism. Shares in EADS fell 10.2 per cent to €25.2 and BAE dropped 7.3 per cent to 337.1p.

In hastily arranged conference calls, several major BAE investors expressed concerns over the tie-up. They warned that they would become sellers if BAE was unable to shed more light on its long-term dividend policy and the degree of French and German influence over the merged entity.

People close to BAE said the company would give up on the deal if it did not create a commercial company, with a balanced board, free of political influence. The UK-based company’s talks with EADS which started in March came after BAE considered a combination with Northrop Grumman of the US or a tie-up with engine maker Rolls-Royce. Neither however was as attractive as a deal with EADS, which would give BAE a strong balance sheet and a diversified portfolio in defence and civil aerospace, one person close to BAE said.

BAE and many analysts see the French government as the biggest potential obstacle in the way of the deal. However, both companies, believe Francois Hollande, the socialist president, could be more amenable to a deal than his predecessor, Nicolas Sarkozy, a close ally of Dassault, BAE’s and EADS’s fiercest French competitor.

Tom Enders, who became chief executive of EADS in May, wants to use the deal to reduce the level of political influence of the French and German governments, whose involvement has lost EADS contracts and dictated key executive appointments, said people close to the company.

The French and German governments each effectively control 22.5 per cent of EADS, but Mr Enders wants their shareholdings in the combined entity to fall below 10 per cent.

EADS is proposing that the French, German and UK governments would each have a golden share, allowing them to block hostile takeovers but no additional veto rights.

What America Lost Over Libya

Πηγή: Strategy Page
March 26 2012

Air operations in Libya made it clear that European made missiles and smart bombs were every bit as good as the American stuff. As a result, the major European arms manufacturers (mainly BAE, EADS, and Finmeccanica) suddenly have billions of dollars in new orders. While some of this business comes from existing customers replacing all the missiles and bombs they used in Libya, a lot of new customers have shown up. These European weapons are now "battle tested" in a highly publicized and successful operation. Many countries are glad to see credible competition for American weapons. Competition means the buyer can negotiate a better deal.

The air campaign over Libya also demonstrated that one European missile, the Brimstone, was unique and superior to anything the U.S. had. Brimstone also demonstrated, once more, that smaller is often better. Smaller missiles and bombs reduce civilian casualties and enable aircraft to carry more weapons (and hit more targets). The star of this category in Libya was the British 55 kg (109 pound) Brimstone. Originally developed as an upgraded version of the American Hellfire, Brimstone ended up as a Hellfire in general shape only. Weighing the same as the Hellfire (48.5 kg/107 pounds), Brimstone was designed to be fired by fighter-bombers, not just (as with Hellfire) from helicopters and UAVs. Aircraft can carry more of these lightweight missiles. These are perfect for small targets, including vehicles that need to be hit, without causing injuries to nearby civilians or friendly troops.

Four years ago, Britain added a dual-mode (radar and laser) seeker to its Brimstone missiles. Originally, Brimstone was to be just an American Hellfire with a British seeker (a miniature, millimeter wave, radar) and configured to be launched from jets. Brimstone did that, but never got a chance to show how effective it was until Afghanistan and Libya. The performance of Brimstone was particularly impressive in Libya, and that got the Americans and French interested in using it as a highly effective anti-vehicle weapon for their fast-movers (jet fighter-bombers).

Hellfire was first developed three decades ago as a helicopter launched anti-tank weapon, but has proved to be very useful against enemy infantry hiding out in buildings or caves. Hellfire later proved to be an ideal weapon for use by larger UAVs. The current version has a range of eight kilometers, while Brimstone has a range of 12 kilometers.

The Brimstone radar seeker makes it easier to use the missile in "fire and forget" mode. The laser seeker is more accurate (to within a meter or two of the aim point.) When used on jet fighters, like the Tornado, there is a special launcher that holds three Brimstone missiles (instead of one larger missile). The launcher hangs from one of the Tornado hardpoints. This launcher will also be used on the new Eurofighter. The nine kilogram (20 pound) warhead is sufficient to destroy vehicles, without causing a lot of casualties to nearby civilians. British fighter pilots have become quite good at coming in low and taking out individual vehicles with Brimstone missiles. Carrying a dozen Brimstones, a fighter-bomber can easily use all of them in one sortie, all the while staying out of range of ground fire.