1. ITV Report

Defence giant BAE sees share price drop following merger talks

Apprentices work on the Eurofighter Typhoon at BAE Warton in Lancashire Photo: PA Images

BAE Systems has seen its share price retreat as investors weighed up potential hurdles it may face if it proceeds with a multibillion-pound merger.

BAE is in talks with Airbus aircraft manufacturer European Aeronautic, Defence & Space (EADS) to create the world's biggest aerospace company with a market value of around 50 billion US dollars (#31 billion).

BAE's statement initially sparked an 11% jump in its share price but it has now pulled back to stand 6% lower, as analysts raised concerns about the complexity of a potential deal.

As well as the sensitive nature of national security work handled by the two firms, the success of the deal also hinges on various government approvals.

The British Government, which has a so-called golden share in BAE that allows it to veto deals that are seen to put the public interest at risk, has already said it will seek to ensure UK interests are "properly protected".

Andrew Gollan, analyst at brokers Investec, advised BAE investors to sell their shares in the wake of the announcement.

"We do not believe competition and approval issues are insurmountable. Practically, however, combination will be complex. Approvals will be required from multiple global governments.

"Perhaps of more significance, agreement by UK, French and German governments on ownership structures and protection of national interests, for example nuclear deterrent, will prove politically sensitive issues."

BAE said a tie-up with EADS would form a "world-class" company in its sector, with combined sales of #60 billion and around 220,000 staff. The merged group would employ around 48,000 in the UK alone.

The proposed deal would be a merger, with BAE shareholders owning 40% of the combined group and EADS shareholders holding 60%, BAE said.

The two groups are working on plans to create a combined firm that would retain its dual listing.

"BAE Systems and EADS have a long history of collaboration and are currently partners in a number of important projects, including the Eurofighter," BAE said.

"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."

The firms are in talks with governments worldwide about the implications of such a deal, given the sensitive and secure nature of their work, BAE said.

Under City takeover rules, both firms have until 5pm on October 10 to announce a deal or walk away.

BAE is an expert in defence, security and the military, whereas the majority of EADS's work is commercial.

EADS, a consortium of aerospace and defence manufacturers from France, Germany and Spain, is headquartered in Paris and Berlin. It employs nearly 15,000 people in the UK including at its Airbus wing sites in Filton, near Bristol, and in Broughton, North Wales.

Other subsidiaries are Astrium, the UK's largest space company, and Paradigm, the world's first commercial provider of military satellite communication services.

BAE produces Astute nuclear submarines and is the largest supplier of land vehicles to the US army.

But the company has been under pressure, reporting a 14% fall in sales last year as military spending in the US and UK was cut. This saw 2011 profits fall 7% to #2 billion.

Defence spending has reduced in BAE"s largest markets, the UK and the US, and was hit last year by a delay in an order for Eurofighters by Saudi Arabia.

Keith Hazlewood, national officer of the GMB union said: "This is a worrying development as so much of our high-end engineering and manufacturing skills are embodied in this company."

A Government spokesman said: "We are aware of this proposal. The business benefits of any such arrangements are a matter for the companies involved. However, given the nature of the companies' activities, we would of course want to ensure that the UK's public interest was properly protected."

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