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BAE Confirms Merger Talks With EADS

by Robin Pilgrim,, London

14 September 2012

Following stock market speculation, BAE Systems and EADS, the parent company of Airbus, have confirmed that discussions are ongoing between the two aerospace giants regarding a potential merger.

After a 10% rise in BAE shares prior to the announcement, the company confirmed in a statement on September 12, 2012, that: "BAE Systems plc (BAE Systems) and EADS N.V. (EADS) are in discussions regarding a possible combination of their businesses. This potential combination would be implemented through the creation of a dual-listed company structure, under which both companies would operate as one group by means of equalization and other agreements but would be separately listed on their existing exchanges."

"BAE Systems and EADS have a long history of collaboration and are currently partners in a number of important projects, including the Eurofighter and MBDA [missile development and manufacturing] joint ventures. The potential combination would create a world class international aerospace, defence and security group with substantial centres of manufacturing and technology excellence in France, Germany, Spain, the UK and the USA."

Due to the two companies operating in distinctly different markets, economies of scale from concluding the transaction are expected to be minimal, and is unlikely to add major value to either company. In theory, amalgamating the companies would make a combined entity more resilient to fluctuations in the commercial and military aircraft markets. BAE said a merged entity would benefit from cost savings "such as from procurement and sourcing efficiencies available to the enlarged group, and substantial new business opportunities".

Having been forced to disclose the negotiations, the two businesses are under tight time pressure to confirm whether the deal is proceeding no later than October 10, 2012. The two companies are in discussions with a range of governments regarding the implications of the potential transaction, due to the companies' "highly secure and sensitive defence businesses in the USA, the UK, France, Germany, Spain, Saudi Arabia and Australia, amongst other countries".

The deal would also need to pass other regulatory hurdles, and potentially a challenge on competition grounds, before final approval by the boards and shareholders.

TAGS: business | law | aviation | mergers and acquisitions (M&A)

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