BAE-EADS merger could create Europe giant to take on Boeing

Sep 13, 2012

Executives have been pursuing merger deal for five months - breakthrough comes over sandwiches in London

EUROPE'S largest aerospace company and biggest defence contractor - Britain's BAE Systems and Airbus owner EADS - are discussing a €50bn merger that would reshape the global defence industry.

European governments have talked for more than a decade about consolidating their national champions to create a pan-continental competitor to Boeing. If the deal is approved (it will require approval from the EADS board as well as France, Germany, the UK and the US) a combined EADS and BAE would be a formidable force in the aerospace and defence industries, serving customers from Washington to Riyadh, says the Financial Times.

“The deal would be the single most significant European response to US defence and aerospace consolidation and the huge defence economic power it created,” said Sash Tusa, an analyst at Echelon.

The New York Times explains the rationale for the deal is in the cycles of defence and passenger airline spending. With its acquisition of McDonnell Douglas in 1997, Boeing sought an income stream to offset the boom-and-bust cycles in passenger travel. After the terrorist attacks in 2001, Boeing’s rapidly growing military business helped buffer it from a collapse in the demand for passenger jets.

In any EADS-BAE deal the logic is reversed: military spending is being curtailed while airline spending has perked up. “This is a way of achieving balance from the defence side,” said Richard Aboulafia, an aerospace analyst at the Teal Group.

Executives spent five months exploring a merger, with the breakthrough coming over sandwiches at a hotel near London City airport. The complex deal faces obstacles: officials in Germany and France, each of which countries has a 22.35 per cent interest in EADS, commented tersely on their support. However, US government officials signaled they are not likely to block it, according to Reuters.

Combined, BAE and EADS would have sales of about 72 billion ($93 billion) based on 2011 numbers, and 220,000 employees worldwide. In comparison, Boeing had sales last year of $68.7 billion.

Boeing CEO Jim McNerney said the Chicago-based aerospace leader wasn't threatened by such a merger, which he predicted would mark the start of global consolidation in the defence industry."I don't see this as something that is going to threaten us fundamentally," McNerney said.

Third-placed Lockheed Martin (sales of $46.5 billion) declined to comment.

BAE Systems shares rose 10.8 per cent on the news by the end of trading in London yesterday. Shares in EADS were down 5.6 per cent.

Sign up for our daily newsletter