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UK Fears French BAE-EADS Stake Push

France is pushing for its government to hold a large stake in the €34 billion defense and aerospace group to be created by combining pan-European EADS and BAE of the UK, raising concerns in London that such a demand would threaten the deal.

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People close to the deal in Berlin and London told the Financial Times that Paris wanted to keep its 15 per cent stake in EADS and reserved the right to buy a further 7.5 percent held by media company Lagardère – a move that could see the French state’s stake in the new company rise from an initial diluted 9 percent to 13.5 percent.

Paris was said to be urging Berlin to follow suit, by buying a 15 percent EADS stake from Daimler, with an option to buy the German carmaker’s remaining 7.5 percent stake if it decided to exit in parallel with Lagardère.

That would imply government shareholdings in the merged company of 18 percent – and eventually possibly 27 percent, which could give Paris and Berlin a blocking minority in the new group. “The UK has said this is unacceptable,” an official said.

Jack Straw, a former Labor foreign secretary, said: “It is critical to ensure parity with the French and German governments; this is not any other industrial company, an electrical company for example, this is absolutely fundamental to Britain’s defense interests in the world. What matters is the French and German shareholdings and what control and influence they carry. If it is decided that they have non-voting shares it’s a different matter.”

Lagardère said any “rumors” about selling its EADS stake were “completely unfounded”. It said only it would decide what it did with the shares.

The French government declined to comment. But it said it intended to remain a shareholder in the new company, but refused further comment on the discussions over terms for remaining so.

Tom Enders, EADS chief executive, conceived the merger with BAE as a way to rid the company of political involvement by giving all three governments a “golden share” each. That would allow them to veto decisions affecting national security such as a hostile takeover – and enable France and Germany to sell their stakes.

The UK, which already holds only a “golden share” in BAE, backs this line. But London and BAE have signaled they would accept Berlin and Paris each holding 9 percent – but no more – of the new company, said people close to the deal.

Some people close to talks stressed the deal would result in no shareholders having greater rights than others and dismissed fears that the US, an important military customer, would reject state shareholdings and scupper the deal.

Others said having Paris and Berlin aboard would make the new group an easier political target there. “Increased state shareholdings are not in EADS’ interest.”

A person in the US familiar with BAE’s thinking said any government stakes with voting rights would lead the US to deem the new company as one under foreign influence – “potentially a deal-breaker”. EADS and BAE had been planning to argue that existing security arrangements would be adequate to protect US secrets.

Berlin has profound concerns about the safety of German plants and jobs. But it has nothing against Germany selling its EADS stake – as long as France does, too.

People close to the talks say the issue is a major sticking point, but that there was much left to negotiate, including other governance safeguards that could make a higher government ownership by Berlin and Paris more palatable for London. Then again, as one official noted, “if we get this solved, there are still plenty of other problems – like jobs and work share – upon which the deal could founder”.

But EADS is getting impatient, wanting governments to declare their positions before the October 10 deadline set by the Takeover Panel. But that deadline can be easily moved and BAE seems less concerned about timing than its continental partner.

Additional reporting by Robert Wright in New York, Hugh Carnegy in Paris, Anousha Sakoui and Andrew Parker in London

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