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TEXT-Fitch: EADS, BAE deal failure shows challenges in consolidation

(The following statement was released by the rating agency)

Oct 10 () - Today's announcement that BAE Systems

and European Aeronautic Defence and Space Company

(EADS) are terminating their merger talks is not surprising, Fitch Ratings says. It shows there is little chance of significant consolidation in the sector in the medium term. There is no immediate rating impact on either company from the announcement, as we had doubts about the potential for a successful deal.

The government shareholder disagreements about the shareholder structure of the merged entity - and the influence each was to exert over the new company - that led to the collapse of the talks demonstrate the deep divisions in Europe regarding strategically and industrially important defence and technology assets. They indicate how difficult, politically and financially, it is to win over the numerous stakeholders involved in such mergers.

Such divisions are central to the challenges faced by the industry in its efforts to boost scale and operational efficiencies, despite the often sound industrial logic of tie-up proposals. We believe such obstacles are likely to remain a permanent feature of the sector in light of its inherent security sensitivities. Therefore, we expect little change to the make-up of the industry in Europe in the medium term.

The failure of the merger does not increase our concern about the broader outlook for top-tier European defence companies, and their ability to cope in a climate of long-term low local defence spending and increasingly competitive export markets. Broad geographic and product diversification and relatively flexible cost structures are likely to offset structural industry headwinds.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at

.

All opinions expressed are those of Fitch Ratings.

(New York Ratings Team)

((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging: pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))