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UPDATE 1-Spotlight on Germany as EADS, BAE inch towards deal

Friday, 5 Oct 2012 | 6:35 AM ET

* France, Britain said to support deal, Germany seeks stake

* Shift in Oct. 10 deadline not ruled out

* New hurdle over future status of core shareholders

* Shares in both companies edge higher

(Adds deadline status, shares)

By Gernot Heller, Emmanuel Jarry and Tim Hepher

BERLIN/PARIS, Oct 5 (Reuters) - EADS and BAE Systems have edged closer towards winning political backing for a $45 billion merger to create the world's biggest arms group amid positive signals from Britain and France, but German misgivings over control is a big obstacle, sources close to the talks said.

A number of potential stumbling blocks have emerged since the proposed tie-up between the Airbus manufacturer and the British defence group was announced last month. These include conflicting political interests in Britain, France and Germany, as well as some shareholders' dissatisfaction with the terms.

Negotiators are sticking to a British regulatory deadline of

Oct. 10 to keep up pressure for a face-saving deal squaring German demands for equal treatment to France, which would have a government stake, with company opposition to outside influence.

But the door has been left open to a 1-2 week delay if the talks show sufficient progress, according to dates circulated for possible internal union briefings on the deal.

"We are working towards Oct. 10," a person familar with the EADS position said.

Two sources familiar with the talks said next Wednesday's deadline, imposed by UK regulators, was optimistic but that the companies would not release pressure for a deal by asking for an extension without a decisive step forward in the talks.

The wait means another frustrating weekend for minority investors who have demanded details of the proposal to create an aerospace and arms company to rival the U.S. giants.

Shares in both companies edged 1 percent higher, and EADS is 12 percent below its level before talks became public last month.

Germany is holding out for the same role as France, which would hold 9 percent in the new group, and wants to host the headquarters. This has put it at odds with EADS, which wants minimum political interference.

GERMAN STAKE

Germany's demand would entail Berlin buying a stake in EADS currently owned by carmaker Daimler . But EADS chief Tom Enders continued to rebuff the idea which also worries UK officials anxious to prevent damage to BAE's vital, but sensitive, U.S. defence markets.

Britain, France and Germany held "reasonably constructive" talks at official level, a person familiar with the matter said, but securing a deal in time for an Oct. 10 deadline looks increasingly likely to need a push from European leaders.

"Britain and France have moved further forward (towards accepting the deal); Germany's position has not changed," a person familiar with the negotiations said.

Talks between Germany and EADS itself are at a standstill while the three affected nations discuss a political response.

A French parliamentary source briefed on the negotiations said that France, Britain, EADS and BAE are now agreed on the deal's basics, but Germany still had to be convinced.

"The decision is now at the highest level. It may be settled between (French President Francois) Hollande and (German Chancellor Angela) Merkel," the source said. "Hollande is ready to call Merkel if needed."

The two leaders held inconclusive talks on Sept. 22.

While Berlin is widely portrayed as isolated, German sources insist it is France's determination to keep a state shareholding and a major headquarters, undervaluing Germany's role in EADS and European defence, that has led to the impasse.

BULLET-PROOF DEAL

"It is a complex and sensitive process and these are not issues that are easily sorted out with side deals in the corridors," a source involved in the talks said.

Meanwhile, a new piece of the jigsaw surfaced as sources close to the discussions disclosed efforts to bullet-proof the merger against a future revival of state interference, should governments buy shares in the future.

France has a 15 percent stake in EADS and under current arrangements could buy out industrial partner Lagardere, the French media firm which wants to sell its 7.5 percent stake.

Britain in particular wants France to forego that right in order to make the deal more presentable to U.S. authorities.

"Everyone is trying to inch forward to a position of comfort on this (point), but you can expect a few convulsions along the way," said another person involved in negotiations. "You don't want a situation where governments feel that if more shares become available, they can go ahead and buy them."

The three nations are also negotiating National Security Agreements in addition to anti-takeover golden shares.

EADS is controlled by a pact between the French state and two core industrial shareholders, Lagardere and German carmaker Daimler, which collectively own 45 percent.

EADS wants to scrap the pact in order to rid the company of special interests and give it "normalised" corporate governance.

But the priority for Britain is to ensure that the deal is as watertight as possible against any objections from the United States, where it will be subject to a thorough review.

(Additional reporting by Arno Schuetze, Philipp Halstrick, Rhys Jones, Reuters bureaus; Writing by Madeline Chambers and Tim Hepher; Editing by David Stamp)

((Madeline.Chambers@thomsonreuters.com)(+49302885230)(Reuters

Messaging: ann.chambers.reuters.com@reuters.net))

Keywords: EADS BAE/

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