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UPDATE 3-EADS/BAE merger demands erupt as talks intensify

Monday, 1 Oct 2012 | 10:44 AM ET

* UK could use "golden share" to block deal unless terms met

* Lagardere says EADS, BAE must rethink merger plan

* Lagardere, EADS CEOs hold meeting

(Adds UK, German sources) By Gernot Heller and James Regan

BERLIN/PARIS, Oct 1 (Reuters) - Airbus parent EADS and arms group BAE Systems must restructure a $45 billion merger, a top shareholder said, as a government source threatened that Britain would block talks to create the world's biggest defence company unless its demands were met.

Faced with a steep drop in global defence spending, EADS and BAE are re-examining a tie-up to create a European giant to compete with American heavyweights such as Boeing which almost came about in the late 1990s.

But state stakeholdings in EADS and BAE's sensitive defence contracts in Saudi Arabia and the United States mean success will hinge on winning over governments to back the idea with talks intensifying in European capitals.

French conglomerate Lagardere on Monday called terms of the deal "unsatisfactory" and demanded a review, adding to pressure from French and German governments with talks moving closer to an October 10 deadline to decide whether to proceed.

"Despite the industrial and strategic potential attributed to it, this plan has not yet demonstrated that it was creating value for EADS," Lagardere said in a statement.

EADS shares have shed more than 4 billion euros ($5.2 billion) in value since news of the talks broke last month due to investors' misgivings. That means Lagardere's 7.5 percent stake has lost more than 300 million euros in value.

"Lagardere invites the executive management of EADS to proceed immediately with an indispensable review of the tie-up plan of EADS and BAE," it said.

Lagardere, the French government and German automaker Daimler are part of a core shareholder pact which underpins EADS, which was formed in 2000 from major aerospace companies in Germany, France and Spain.

CEO Tom Enders, who with BAE counterpart Ian King wrote an article published on Monday in three European papers defending the deal, met Lagardere's CEO Arnaud Lagardere on Monday.

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For analysis on EADS shareholder pact:

Analyst interview on deal:

For Breakingviews on EADS-BAE merger:

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A spokesman for the French media group declined to comment on the content of the talks, which he said was "confidential".

In the company's statement earlier, Lagardere's concerns focused on conditions of the merger, which call for a 60-40 percent split between EADS and BAE in the combined company.

Lagardere shares were up 0.82 percent at 21.43 euros as of 1425 GMT, while EADS was up 0.99 percent at 24.91 euros and BAE 0.95 percent ahead at 328 pence.

UK COULD BLOCK DEAL

The British government would use a "golden share" in BAE to block a merger unless the new group's defence business is based in the United Kingdom with a British CEO, a UK defence ministry source said.

Britain is also opposed to a proposed arrangement under which Germany and France would retain nine percent stakes each.

Any deal would require agreement on the rights and/or ownership role of the British, German and French governments. Jobs are also an important component of the talks.

One source in Germany, who is privy to the negotiations, said a deal collapse was now more likely than reaching agreement among the three governments which all were pushing their interests in the complex commercial and political negotiations.

In addition to BAE and EADS having factories across Germany, France, Spain and the UK, large BAE operations in the United States and Saudi Arabia extend the list of governments who will need to ensure the deal satisfies national security concerns.

BAE builds nuclear submarines for the British and its equipment and employees deploy with U.S. Special Forces.

A person familiar with the deal added: "This issue is not so much a question of whether it is acceptable for the British government. The real issue is that this would undermine the market chances of the combined group in the U.S."

On the sudden rise in rhetoric, German Defence Minister Thomas de Maiziere said:

"We don't want to add further fuel to the debate ... with more speculation. All the information leaks can lead to a result but they can also ruin everything.

"The ministers won't be party to this. Therefore, you can't make any assumptions about our positions. What you can assume is that we will find a common position. But it doesn't only depend on us."

SHAREHOLDERS PACT

EADS and BAE Systems announced almost three weeks ago that they were in talks to fuse planemaker Airbus with Europe's largest defence contractor.

Barring an extension, EADS and BAE have until Wednesday next week under UK takeover rules to set out detailed plans.

Certain businesses will need to be ringfenced because of the sensitive nature of the defence work involved and members of EADS' core shareholder pact must be satisfied with the stakes and rights they retain.

In addition to Lagardere's 7.5 percent stake in EADS, the French government holds 15 percent, as does Daimler, though it retains voting rights equivalent to a 22.5 percent holding.

Regarding Lagardere's misgivings, some stock market analysts suggested the media company, which already had plans to eventually sell out of EADS, might simply be seeking better conditions for such a future sale.

"I think they just want the right parity for exit," one London-based arbitrage trader said of Lagardere's statement.

A spokesman for EADS declined to comment on the Lagardere statement.

A source close to Daimler, meanwhile, said the company was keen for the matter to be resolved before next week's deadline, warning against lengthy talks.

"It has to be in the interest of EADS shareholders that there is certainty by Oct. 10 whether a transaction can be carried out or not," the source said. "A needlessly drawn-out discussion would be harmful to both EADS and its shareholders."

DILUTED STAKE

German magazine Der Spiegel said on Sunday that France and Germany had agreed that each should hold a 9 percent diluted stake in the merged entity, citing high-level civil servants.

A spokesman for German Economy Minister Philipp Roesler declined to confirm or deny the report.

French officials were not immediately available to comment, but sources familiar with the matter denied the two sides were in agreement on the shareholding or how their relative interests should be guaranteed.

French and German defence and foreign ministers were due to meet in Germany on Monday.

In their joint newspaper article on Monday, the bosses of EADS and BAE sought to reassure investors about the benefits of the plan amid what they deemed "myths and misconceptions" about it.

They called it an idea born of opportunity, not necessity, and that it would create growth, allowing the firms to better ride out the ups and downs of civil aviation demand and defence spending.

($1 = 0.7773 euros)

(Additional reporting by Blaise Robinson and Leila Abboud in Paris, Arno Schuetze in Frankfurt, Tim Hepher in London, Frank Siebelt in Germany.; Editing by Jason Neely and David Stamp)

((james.regan@thomsonreuters.com)(+33 01 49 49 53 84)(Reuters Messaging: james.regan.thomsonreuters.com@reuters.net))

Keywords: LAGARDERE EADS BAE/

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