BAE and EADS merger in flux over MoD Trident fears

And so the wrangling begins. The MoD is concerned about the future of Trident, and government 'golden shares' in a merged BAE/EADS may not be allowed under European law.

by Michael Northcott
Last Updated: 19 Aug 2013

As MT predicted last week, here begins round one of difficulties over the proposed £30bn merger of BAE and EADS. The proposed merger is subject to the approval of the British, French and German governments, thanks to their existing shareholdings in the company. But the MoD could throw a spanner in the works over fears that the merger will threaten the Trident nuclear deterrent programme. As the British government has a so-called golden share in BAE, it has the power to prevent the merger happening at all. Execs at BAE – obviously keen to seal the deal – have offered a pledge to ring fence Trident if the £30bn deal goes ahead. 

So all is settled then, right? Wrong. Now that lawyers are poring over the nitty-gritty of the merger, the deal has hit another stumbling block. The two firms want the ability to give each state the right to block future attempts to take over the combined group – it’s a nice sweetener and a good way to win government approval. These golden shares mean governments can block foreign shareholders from buying more than 15% of the company. But, alas, it may not be as easy as that thanks to European law. Expert lawyers are warning that whilst defence companies are the only businesses allowed to issue golden shares to governments, the make-up of the new business will be incompatible with this special dispensation. 

Defence will constitute just 50% of the new company, and the rest of it would be civil aviation, meaning it would no longer be exempt from the rules. This is the kind of law that Brussels has got sniffy about before: in 2003 the European Court ruled that the UK government’s golden share in BAA was illegal. Such concerns will only add to the shareholder worry that began when the merger talks were announced last week. Shares in EADS dropped 10% and BAE dropped 6% once news of the talks broke. Not the best start to what will inevitably be a long and complicated deal. 

So the future of the deal rests firmly in the hands of European and individual governments. Currently, Britain has a golden share in BAE, and France and Germany have 22.5% each in EADS effectively giving them the same power of veto. There is also a good deal of head scratching as to what the commercial logic of the deal would be, aside from simply creating the world’s biggest defence company. Not to mention that several customers of the two firms may be irked by the outcome…

From this point onward, extremely careful negotiation will be required of the two firms if the world’s largest defence company stands a chance of forming…

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