BAE Ready to Quit EADS Deal over Pentagon Ties

on Sep 25, 2012

BAE Systems (LON:BA) has warned that it would walk away from its proposed merger with European Aeronautic Defence & Space (PINK:EADSF) if the deal puts at risk BAE’s relationship with the US Pentagon, The Financial Times reported on 23 September, 2012. Little more than two weeks before the companies aim to complete their negotiations, BAE made clear that is not willing to jeopardise its special status in the United States where the defence company has a significant presence. To preserve its privileged business relationship with the Pentagon, the UK aerospace company is willing to quit Europe’s largest industrial merger in years.

A person close to BAE and quoted by the FT said: “BAE will not do this deal if its Special Security Arrangement (SSA) has to change to look more like that of EADS.” Providing greater flexibility than more restrictive proxy deals, BAE’s SSA has allowed it to work on many lucrative US national security projects, such as the new F-35 Joint Strike Fighter. This type of arrangement has also allowed the British company to grow into the biggest and most respected foreign military supplier in the US, where it makes $14 billion (£8.6 billion) in revenue and employs 40,000 people in about 40 states. Almost all BAE’s engineers and staff members are American, as are its top executives, including the company’s chief executive Linda Hudson.

!m[](/uploads/story/458/thumbs/pic1_inline.png)The Franco-American EADS, which owns the European aircraft manufacturer Airbus, also has an SSA, but it is stricter than BAE’s and means it has to ring fence 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. Accordingly, BAE does not want to replace its SSA with the one of its potential future partner. Notwithstanding BAE’s insistence to keep its arrangement, lawyers close to the US approval process believe that following the potential merger, the British company will not be allowed to keep its more generous SSA. According to a quoted by the FT lawyer, who works on cases that go before the Committee on Foreign Investment in the US, a combined EADS-BAE is much more likely to be treated like EADS than BAE. He believes the merger could pass US hurdles, but not without sacrifice on BAE’s part.

The proposed tie-up announced by BAE and EADS on September 12 would change the landscape of the global aerospace industry, creating a $45 billion (£27.7 billion)-worth European competitor to US groups such as Boeing, with the ability to develop a big presence in the North American market. Under the terms of the planned merger, EADS would receive the majority 60 per cent stake of the new global aerospace and defence group, whilst BAE would control the remaining 40 per cent. On October 10, the European companies will face the deadline to spell out the detailed merger plans, which would then be subject to antitrust and US security review.