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  1. ITV Report

Claims Merkel scuppered BAE deal

German Chancellor Angela Merkel was "philosophically opposed" to the deal Photo: PA Images

Plans to create a European aerospace and defence giant were in tatters tonight after German opposition scuppered the £28 billion deal.

A source close to the German Chancellor Angela Merkel also claimed she was "philosophically opposed" to merging a civil aerospace company with a defence manufacturer.

The proposed merger of BAE Systems and EADS would have created a company with combined sales of £60 billion and more than 220,000 staff, with around 52,000 in the UK alone.

But after days of political wrangling, the two companies were forced to ditch the bid, giving rise to fears over job security at BAE, which operates from 50 UK locations.

BAE chief executive Ian King said the company was "obviously disappointed" but insisted it was "financially robust" and remained confident about its future.

Unions, defence analysts and Labour politicians all raised concerns, saying that the merger would have created a stronger company and guaranteed jobs in the long term.

David Reeths, director of consulting at defence analyst IHS Jane's, said: "This will mean that job guarantees that would have been part of the deal will not be made.

"While the UK Government was seen to have supported the merger, the Government may face demands for more direct industry support to secure BAE's future."

The tie-up would have improved BAE's exposure to commercial markets - as EADS is an Airbus aircraft manufacturer - in a climate when public defence spending is declining.

BAE, which operates in UK locations from Glasgow to Portsmouth, reported a 14% fall in sales last year as military spending in the US and UK was cut.

Unite, the union, urged the UK Government to strengthen its "golden share" in BAE by taking an active stake in the company to safeguard British jobs and boost manufacturing.

The union, which represents more than 30,000 skilled workers across the two companies, had been pressing for guarantees over jobs if the merger had gone ahead.

National officer Ian Waddell said: "A merger, with a jobs guarantee, would have created a strong new company that could have protected the UK's long-term interests."

Germany is understood to have dealt the final blow to the troubled deal amid reports that German Chancellor Angela Merkel opposed the merger.

France has a direct stake in EADS, while German influence is held through a 22% stake owned by car maker and industrial group Daimler.

Ms Merkel and her government are thought to have insisted on a 9% stake in the enlarged group to match France's holding.

It is thought that America had concerns over sensitive military assets transferring from British ownership to a European business.

In its statement, BAE said it had had a great deal of "constructive and professional engagement" with respective governments but could not reach an agreement.

Mr King added: "We believe the merger presented a unique opportunity for BAE Systems and EADS to combine two world-class and complementary businesses to create a world-leading aerospace, defence and security group."

He added that the company would not make any moves that would jeopardise its relationship with the US government.

BAE, which has a £40 billion order book, insisted the proposed merger was an opportunity rather than an "absolute necessity".

A number of key contracts have been won this year, including £149 million for Typhoon and Tornado support to the RAF and £446 million for Typhoon support across other countries including Germany, Italy and Spain.

In the UK, EADS employs around 10,600 at its Airbus sites at Filton, near Bristol, and Broughton, North Wales.

Other subsidiaries include Astrium, the UK's largest space company, where it employs 2,800 at main bases in Stevenage and Portsmouth.

EADS was looking for a way into the US market, as only 12% of its annual sales currently come from North America.

Chief executive Tom Enders said it was a "pity" the companies did not succeed but added: "I'm glad we tried".

British politicians had also voiced concerns over the level of Franco-German ownership when the UK would have no direct stake.

Defence Secretary Philip Hammond said the Government understood the "attraction" of the merger but added it had to be done in "Britain's national interest".

He said: "We set out our requirements to make that happen and the French and German governments have done the same.

"Obviously the company is looking at all of the facts - and all of the stakeholders - and has just decided it was too difficult to progress this project further."

As well as the political difficulties, major shareholders have also put the deal under pressure.

BAE's biggest shareholder, Invesco Perpetual, which owns more than 13% of the group, said it did not understand the strategic logic of the merger and is worried it will threaten BAE's "unique and privileged position" in the US defence market.

According to the Financial Times earlier this week, 30% of BAE shareholders were opposed to the tie-up.

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