War of words as BAE and EADS frantically push for merger

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The biggest UK investor in BAE, Invesco, has issued a heavy warning about the deal. Photo: Peter Byrne/PA Wire

Can the mega merger between the British defence company BAE, our biggest manufacturing employer, and EADS, the enormous Franco-German aviation company, really go ahead?

In the last 24 hours the Defence Secretary Philip Hammond has talked about the UK Government's "red lines", and crucially this morning the biggest UK investor in BAE, Invesco, has issued a very strong warning about the deal, questioning whether it makes any sense at all. French and German concerns have been made plain too. So as the Wednesday deadline for the deal to be done (or an extension sought) approaches, can it really be done?

There is still a "frantic negotiation", a source close to the deal tells me, adding: "fundamentally the economics of the deal are still sound". If the deal was off, the two companies would have to issue a formal statement. That hasn't happened yet and talks are still very much going on. But the intervention by Invesco has thrown a mighty spanner in the works. If the companies get as far as doing a deal, it would have to be approved by their shareholders. Although the shape and timeline of any vote is very much up in the air, the very public objection of Invesco - who owns more than 13% of BAE - is troublesome.

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Supporters of the BAE-EADS merger have accused their opponents of short-sightedness. Credit: Chris Ison/PA Wire

But insiders familiar with the negotiations hit back, criticising Invesco for trying to call the shots with only the short term in mind. One said:

It's great because this shows what a****oles the City are ... all it does is open them up to ridicule ... They are just focused on short term return and this is a long term business.

And as for concerns about the deal articulated by some Conservative backbenchers like Ben Wallace? Dismissed as ill-informed fears from those who spend their time "quaffing champagne and caning subordinates." Ouch.

That might not exactly go down well with those who have genuine concerns. Yet both companies appear to still be committed to the deal and are working intensely to do more to "align the three countries". I'm told the hunt is on for something to appease what was described as Germany's "institutional paranoia" - one idea is for the German state bank KFW to take a stake in the merged company, another to have a subsidiary HQ just outside Munich.

What seems increasingly likely is that the companies will ask for an extension to the deadline past 5:00pm this Wednesday. It is up to them to ask, and the Takeover Panel has no incentive to refuse as long as they think the companies are behaving reasonably. But as negotiations go on, criticisms keep coming, and no matter how robust the companies' defence may be the deal is clearly under threat.