UPDATE 4-EADS-BAE merger plan hits political crunch point

* EADS, BAE deny report talks blocked

* Oct. 10 negotiating deadline could be delayed

* New hurdle over future status of core shareholders

* Shares in both companies edge higher

(Recasts, adds quotes, background)

By Tim Hepher and Christiaan Hetzner

PARIS/FRANKFURT, Oct 5 (Reuters) - Tensions over asupermerger between EADS and BAE Systems spilled into the openon Friday and cast doubt on a rapidly approaching deadline asFrance, Britain and Germany jockeyed over the role of the statein the world's largest aerospace and arms group.

After rattling investors with a $45 billion merger projectlast month, the chief executives of Europe's largest aerospacefirms headed into the weekend with the fate of their historictie-up plans hinging on events outside their control.

"The companies don't think it's all over so we can expect afairly agitated weekend of phone calls," a diplomatic sourcefamiliar with steadily rising contacts between capitals said.

While both firms want a minimum government presence, mainlyin order to protect BAE's key defence interests in the UnitedStates, the deal has sparked a three-way political logjam.

France wants to keep a stake but will not rule out addingmore, Germany wants to match France's role to avoid being leftaside by Europe's other main powers and Britain wants to capstate involvement, several people familiar with the talks said.

Time is running out before a UK stock market deadline ofOct. 10 for a blueprint of the deal, which affects nationalsecurity interests on both sides of the Atlantic.

A French government source said the deadline could beextended by 28 days, something the companies are so farreluctant to do in the absence of concrete progress.

Senior aides to the leaders of all three countries held avideo conference on Friday and "put everything on the table tosee if we can go forward," the source added.

EADS and BAE denied a German report thatthis had resulted in deadlock and that the merger proposal hadcollapsed.

"We have been informed by the governments about the statusof the discussions, but in no way have we been told that thedeal is off," a spokesman for Airbus parent EADS said.

"We continue to work towards the Oct. 10 deadline that wehave been given by the UK government," he added.

Nonetheless, a number of potential stumbling blocks haveemerged since the proposal was announced. These includeconflicting political interests in Britain, France and Germany,as well as some shareholders' dissatisfaction with the terms.

Germany is holding out for the same role as France, whichwould hold a diluted stake of 9 percent in the new group, or 10percent when a small investment by state bank CDC is included.This would entail buying shares held by car firm Daimler.

Both countries want the prestigious headquarters.

A new stumbling block emerged overnight as sources involvedin the talks told Reuters that France was under pressure tothrow away the key to future government share purchases.

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

Together the stakes add up to 13.5 percent after dilutionunder the proposed 60:40 merger that leaves EADS in control.

Britain wants France to rule out such purchases in order tomake the deal more presentable to authorities in the UnitedStates, where BAE earns nearly half of its revenue.

But the French government source said Paris did not want tobe "shackled" and refused to sign away any future rights.


Created in 2000, EADS is controlled by a pact between theFrench state and two core industrial shareholders, Lagardere andGerman carmaker Daimler. The trio collectively own 45 percent.

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

The priority for Britain is to ensure that the deal is aswatertight as possible against any objections from the UnitedStates, where it will be subject to a thorough review.

Its proposal would effectively replace the shareholder pactwith a form of industrial 'stability pact' freezing governmentinvolvement. But the idea raises thorny questions of sovereigntythat have bedevilled European politics in recent years.

Most sources close to the talks said they did not think thisissue would be allowed to become a dealbreaker.

With pride and power at stake, brinkmanship had been widelyexpected in the run-up to the Oct. 10 deadline, echoing Europeannegotiations on matters from farm aid to debt bailouts whereracing the clock is the favoured way to hammer out disputes.

But the wait means another frustrating weekend for minorityinvestors who have demanded details of the proposal to create aEuropean player outstripping U.S. giants Lockheed and Boeing.

"As far as we are concerned, there's been no attempt toexplain the rationale for the deal to investors," said BarryNorris of Argonaut Capital Partners, an EADS investor.

Shares in both companies edged 1-2 percent higher, clawingback part of the double-digit losses EADS in particular hassustained since the talks became public last month.

With time running out for a deal, Britain and France areseen as most enthusiastic about the proposed merger whileGermany has so far been the most critical, negotiators said.

"It requires a little more from all sides," a diplomat said.

(Additional reporting by Gernot Heller, Emmanuel Jarry, KateHolton, Elizabeth Pineau, Paul Taylor, Andrea Shalal-Esa,Reuters bureaus; editing by Philippa Fletcher)


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

Keywords: EADS BAE/