EADS and BAE Merger Might Set off Industry Consolidation, Moody’s Says

on Sep 19, 2012

On 17 September 2012, Bloomberg reported that according to the credit rating company Moody’s (NYSE:MCO), the much-discussed potential merger between the British defence and aerospace systems developer BAE Systems Plc (LON:BA, PINK:BAESY) and the Toulouse-based European Aeronautic Defence and Space Company (EPA:EAD) is likely to prompt other defence contractors to consider consolidation as well as asset trades.

The two companies announced on 12 September 2012 that they were exploring a combination so as to make each company’s business less prone to cycles. The consolidation, which is valued at €38 billion (£30.5 billion), is considered the biggest in the industry. EADS is more than twice the size of BAE in terms of revenue, with the companies announcing that EADS would own 60 percent of the enlarged enterprise, whereas BAE would hold the rest.

!m[](/uploads/story/419/thumbs/pic1_inline.png)“We expect that the merger talks have now triggered at least consideration of a new round of business realignments within the global aerospace and defence industry, the immediate effects of which could include counteroffers for BAE from other large defence contractors,” notes Moody’s senior vice president Russell Solomon, as quoted by Bloomberg.

According to Moody’s, the merger would be a positive development for the credit ratings of both companies, given the cost savings potential as well as the greater global reach. EADS is rated A1 by Moody’s, which is the fifth-highest investment-grade rating on a 10-step scale. BAE, however, is rated Baa2, or the second-lowest investment grade.
Despite the positive prospects for the merger, some concerns have already emerged, with the Financial Times recently reporting that senior figures on the right of the Conservative Party have noted that the deal might have a negative impact on the relations between the UK and the US. “My instincts are that this will create significant difficulties if we want to have bilateral defence programmes with the Americans in future”, pointed out Bernard Jenkin, a former Conservative defence spokesman, as quoted by the FT. Phillip Hammond, defence secretary, in turn noted that the government would only approve the deal if it was in the country’s national interest. The other major concern expressed by the Tories is the impact of the merger on BAE’s UK workforce. “When they start identifying overlaps, what I don’t want to see is the French sweeping in and saying we will just get rid of the British workforce”, notes the Tory MP Ben Wallace, as quoted by the FT. The French and the German governments each have effective control over 22.5 percent of EADS, with the French government directly owning 15 percent. The UK government on the other hand holds a golden share in BAE, giving it veto power over major strategic decisions.

The potential French (and German) involvement in BAE Systems has caused concerns in Washington as well, with the FT reporting that the British defence group might have to agree to more rigorous security arrangements as regards its US activities. “The introduction of French and German involvement generally speaking will mean that the US government will require enhanced mitigation measures,” notes Mario Mancuso, a former senior adviser on the Committee on Foreign Investment in the US, which makes the decisions on national security clearance for such deals.


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