EADS-BAE Launch Merger Drive to Redraw Global Aerospace Map

European aerospace giants EADS and BAE Systems are driving to re-draw the global battlefield for the booming aircraft market, with a tie-up boosting EADS in the U.S. and creating a defence and civil aircraft behemoth.

EADS controls airliner maker Airbus and has interests in defence and space industries.

BAE Systems is focused more in the defence sector and in the United States where both face daily market battles with Boeing and future competition from industries in emerging countries.

EADS was worth 23.15 billion euros and BAE Systems 11.81 billion pounds (14.7 billion euros) before their shares fell sharply in response to merger/takeover talks.

That amounted to joint capitalisation of 37.85 billion euros ($48.9 billion).

The announcement that they want to marry will have to cross major obstacles, including anxieties on potential job losses in France which is already agonising over huge cuts at auto giant PSA Peugeot and in Spain, where unemployment is the highest in the European Union.

The giants' businesses in the sensitive defence industry and ownership structures -- Britain's stake in BAE and French-German shares in EADS -- could further complicate negotiations.

"It has been problematic for EADS with the French and the German governments so I fail to see how the addition of another government would reduce the complexity," said Guy Anderson, senior analyst at IHS Jane's Defence Industry.

Downgrading its rating for EADS stocks, Citigroup pointed out that "achieving merger synergies for the combined entity could be difficult, particularly given the need to ringfence certain strategically sensitive activities."

The European Aerospace Defense and Space Company emerged from a restructuring and merger of French, German and Spanish aerospace firms in 2000.

The deeper origins of its key business Airbus lay in a complex government structure that took into account French and German national interests, a factor that caused difficulties for British shareholders who once held minority stakes in Airbus through BAE.

BAE sold its 20-percent in Airbus in 2006, citing its ambitions to concentrate on transatlantic strategy as a reason, in contrast to the European manufacturing focus of Airbus.

The BAE divestment was also carried out against the backdrop of with the complexities and national sensitivities around the governance of Airbus.

BAE left at about the time Airbus ran into deep crisis over its A380 jumbo airliner programme. This in turn revealed deep weaknesses in the firm and acknowledgement by management that they had to switch from artisanal to modern management structures.

At that time the European partners were wary of BAE's preference for looking towards the United States, but the tie-up proposal suggests that EADS, anxious to develop in the U.S. and to dilute its dependence on costs in euros, has also adjusted its view.

Today France and Germany have equal interests of 22.35 percent each in EADS, while Spain holds 5.45 percent.

The British government meanwhile has a special share in BAE, born in 1999 through British Aerospace's acquisition of Britain's General Electric company.

This share blocks any foreigner from holding more than 15 percent in BAE, posing a potential hurdle in negotiations.

The two giants said talks were now centred on a possible 60-percent interest for EADS shareholders in the enlarged structure, and the remaining 40 percent for BAE, although there would be a unified board and management structure.

The discussions immediately stoked worries of job cuts in EADS, which has key sites in France, Germany and Spain.

Airbus moved quickly to quell fears, with its chief executive Fabrice Bregier saying that a merger "is not expected to affect Airbus and its employees in daily operations."

He said: "Airbus' organisation, product plans, engineering, manufacturing and strategies for the future should continue as is."

Arnaud Montebourg, the French minister for industrial regeneration who has been highly critical of the effects of globalisation, acknowledged that the government understood the anxieties of employees, but made no other comment.

Berlin was also reticent to talk about the negotiations, with a source for the federal government saying only that the government's support had been sought for the merger and officials were examining all relevant questions.

If the deal goes through however, it could open up the U.S. aerospace market to EADS.

BAE already does about 7.9 billion pounds out of 19.1 billion pounds of its sales in the United States, and EADS chief Tom Enders has spelt out his group's ambition to grow in the vast north American market.

EADS recently took a big step on Boeing's home turf, saying it would open a $600 million assembly plant in the Alabama which will produce the firm's first U.S.-built plane by 2016.

The move came after it lost a U.S. Air Force decision to award a major aerial refuelling tanker contract to Boeing after a politically charged contest.

Andersen points out that BAE is "far bigger in the U.S. than it is in Europe" as a result, a merger would see EADS "catapulted towards the top of the Department of Defense contractor list."

A clear trigger pushing the two together had been loss of a major contract in India to France's Dassault, a source close to Enders said, with both groups wanting to build a company in which defence and civil businesses would have equal weight.

For Airbus' unionist Francoise Vallin, the merger is "excellent news", with reservations about the ffects on jobs.

"EADS was essentially focused on civil, and this allows EADS to reposition itself in a rather strong way on the defence side," she said.