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Deadline looms for proposed BAE-EADS merger

LONDON -- Defense and aerospace companies BAE Systems PLC and EADS have hours to agree on whether to go ahead with a proposed merger that has prompted a wide range of concerns in Britain, France and Germany.

British-based defense contractor BAE Systems and Franco-German EADS NV, the parent of Airbus, must reach an agreement before 1600 GMT Wednesday on whether they would ask regulators for more time to finalize their plans, or abandon the deal.

The proposed mega-merger would create a global aerospace and defense company, with combined sales of more than (EURO)70 billion ($90 billion) and more than 220,000 employees. The combined company would leapfrog U.S.-based Boeing Co., the long-time rival of EADS, to become the market leader.

The deal has been fraught with difficulties because of political objections from the governments of the U.K., France and Germany. All three must approve the deal for it to go ahead.

The French government owns 15 percent stake in EADS and French media company Lagardère has 7.5 percent. Germany's government does not have direct stakes in EADS, but exerts influence through auto maker Daimler and private and public banks, which combined hold a 22.5 percent stake.

The British government does not hold a stake in BAE, which was privatized in the 1980s, but has a right of veto on potential mergers. BAE is a central lynchpin of the commercial relationship between the U.S. and the U.K.

BAE chief executive Ian King and EADS chief Tom Enders wrote in a joint statement on Sept. 30 that they proposed "to replace the shareholder arrangements which currently give Daimler, Lagardère and the French state joint control over EADS."

"That would mean creating a business with governance structures which would enable it to operate in a normal commercial manner and which confers the same rights on all shareholders, large and small," they wrote.

France and Germany have fought for an equally strong say in the new merged entity, while Britain is opposed to high Franco-German government stakes.

On Sunday, British Defence Secretary Philip Hammond declared this was a "red line" issue for the U.K. and warned that the government would veto a deal unless France and Germany reduced their stakes.

And British lawmakers wrote to Prime Minister David Cameron last week, warning that the proposed merger would hand control of much of the British defense industry to a company that would not safeguard the country's interests.

Investors are keenly awaiting the decision. EADS was trading 0.3 percent higher at (EURO)26.17 and BAE was down 1.2 percent at 322 pence.

EADS, one of Europe's biggest companies, is also parent to helicopter maker Eurocopter, satellite builder Astrium and defense electronics contractor Cassidian.

BAE declined to comment on the talks Wednesday ahead of the deadline. No one at EADS could immediately be reached.

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Sarah DiLorenzo in Paris contributed.