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UPDATE 2-European governments in race to save EADS-BAE merger

Monday, 8 Oct 2012 | 11:38 AM ET

* Talks push on after failure to agree state shareholdings

* Plan ready to extend deadline if political progress made

* BAE top investor Invesco attacks $45 billion merger plan

* UK minister warns of "red line" regarding state stakes

(Changes dateline, adds UK Conservative MP, details)

By Sophie Sassard and Emmanuel Jarry

LONDON/PARIS, Oct 8 (Reuters) - Britain, France and Germany pushed on with talks on Monday aiming to prevent a disagreement over state shareholdings wrecking a proposed merger of EADS

and BAE Systems .

Plans by Airbus parent EADS and UK arms firm BAE Systems to create the world's largest aerospace and defence company must overcome a knot of political concerns over security and jobs.

Facing a 1600 GMT Wednesday deadline set by Britain, the goal is to make enough progress over the central issue dogging the talks to allow BAE Chief Executive Ian King and Tom Enders of Franco-German EADS to seek an extension.

BAE's top investor questioned the very rationale of the $45 billion deal.

"If they can get the central issue of shareholding resolved, then there'll probably be some more time to tie up other issues like headquarters, weights on the board and other matters," said a senior diplomat following the talks.

"Otherwise, Enders and King have signalled they will pull the plug on the 10th (Wednesday)."

Officials failed to resolve incompatible demands over state involvement in a video conference on Friday. EADS and BAE denied German reports that the talks had collapsed.

British Defence Secretary Philip Hammond warned that Britain would block the deal if key "red line" priorities were not met, including an ability to cap the influence the French and German governments would have on the new company.

He told the BBC on Monday he saw little chance of a deal being reached by Wednesday's deadline. <------------------------------------------------------------- EADS/BAE market cap, share price multiple ------------------------------------------------------------->

Plans have been drawn up to request extra negotiating time, but the companies first want to see real political progress to show British regulators, banking sources said.

BAE's top shareholder Invesco Perpetual blasted the proposed deal on Monday, citing state interference, poor terms and a lack of strategic rationale. The investment company, which owns 13 percent of BAE, is reported to have clashed in private with BAE leaders as soon as the talks surfaced last month.

BAE shares dipped 1 percent. EADS was fractionally lower.

As problems pile up, all sides have moved to deflect the responsibility in case the talks break down, but industry experts say it is too early to say which way the talks will go.

Advisers and company executives worked through the weekend with an EADS summit in Munich, where Germany wants to place the new company's headquarters.

EADS was created from a merger in 2000 only after talks between France and Germany broke down and the plan collapsed, bringing the two sides back together to negotiate a complex shareholder pact limiting the role of the French state.

SOVEREIGNTY

To improve the chances of winning approval in the United States, Britain wants France to commit in writing to forego any future increases in its shareholding, which would start out at 9 percent under a proposed 60:40 split between EADS and BAE.

France has told partners it has no intention of upping its stake but is unwilling to surrender sovereignty over future industrial policy. Barring a wider escalation of the problems surrounding the deal, sources briefed on the discussions said a formula would probably be found to get round the impasse.

Government leaders are being kept in the loop on the talks but there are so far no plans for direct intervention or a three-way summit, officials said.

Britain's David Cameron faced a revolt over the merger by 45 members of parliament last week after they said in a letter to the prime minister that Germany and France should take no stakes in the new company.

Their stance was met with opposition from a surprising source on Monday, when Mike Turner, the former chief executive of BAE who sold the company's stake in Airbus in 2006, was quoted as saying links with EADS now would help.

"Large parts of BAE's UK operations face a run down in activities in the next few years as existing programmes come to an end," he told the Financial Times, adding jobs would be lost.

"If you put BAE and EADS together, the BAE part of the entity would benefit from a stronger balance sheet of the combined group and would be in a better position to win new orders, especially in export markets."

Yet the leader of the group of MPs, on Monday questioned whether a possible European agreement in which France retains 9.5 percent of the new company, for example, would allay U.S. fears of state control.

Conservative MP Ben Wallace, who organised Friday's letter, said he would visit Washington to talk to "senate officials" to find out how part ownership of the new company by nation states would affect BAE's favourable relationship with the U.S. market.

Britain left open the door on Sunday to a German state participation in EADS-BAE.

The United States is seen likely to want assurances that a system of co-operation in EADS between French and German governments or their industrial allies will not be resurrected.

Any risk of foreign state control is crucial as Washington considers whether to impose new conditions on the way BAE operates in the United States - a red line for the company and Britain.

U.S. experts said this weekend anything over 10 percent would undermine the chances of U.S. approval.

(Additional reporting by Kate Holton, Andrea Shalal-Esa, Paul Taylor, Mohammed Abbas, Jason Neely; editing by Peter Millership)

((tim.hepher@thomsonreuters.com)(+33 1 49 49 54 52)(Reuters Messaging: tim.hepher.thomsonreuters@reuters.net))

Keywords: EADS BAE/

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