UPDATE 3-Britain raises pressure over EADS-BAE merger

* No agreement yet by Britain, France, Germany on stakes

* No extension to Weds deadline unless progress made

* BAE top investor Invesco attacks merger plan

* British, French officials held two-way talks

(Recasts, adds details) By Sophie Sassard and Emmanuel Jarry

LONDON/PARIS, Oct 8 (Reuters) - Britain turned up the volumein a dispute over French state involvement in any tie-up ofaerospace groups EADS and BAE Systems on Monday, leaving theEuropean mega-merger on a knife-edge less than 48 hours before adeadline for the deal.

The disagreement over whether Paris can increase itsshareholding in future is the latest obstacle to plans to createthe world's largest aerospace group, with Berlin's desire for amore favourable deal also a possible hitch ahead.

Resurrecting an idea abandoned by European governmentleaders in the late 1990s, the new combine would employ 220,000people and team Airbus airliners with BAE's weapons factories.

To succeed, the deal must balance industrial and securitysensitivities in Europe and avoid fuelling concerns overforeign state ownership that could damage BAE's standing in theUnited States, which is a key priority for Britain.

British Defence Secretary Philip Hammond told Reuters thathis opposition to France, which owns 15 percent of EADS, liftingits stake in the merged group beyond a diluted level of 9percent implied by the proposed deal, was "not a momentary one".

But a French government source insisted Paris must have theoption to buy shares in future from French company Lagardere; the firm wants to sell its stake - currently 7.5percent of EADS - in order to focus on its core media business.

"If France does not even have the possibility to considerbuying the stake which Lagardere wants to sell, then for us itis not doable," the French source told Reuters.

Confirming the Anglo-French split had become a key stickingpoint, after Germany's demands for equal status dominatedearlier talks, people familiar with the matter said British andFrench officials held discussions without the Germans on Monday.

A German demand to host the group's headquarters remainsanother potential hurdle, however.


With a put-up-or-shut-up deadline set by London stock marketrules looming on Wednesday, criticism from private investors inthe two firms also raised questions about whether managers havethe momentum needed to argue for extra time for negotiations.

Invesco Perpetual, a fund manager which owns 13 percent ofBAE, blasted the proposed deal, citing state interference, poorterms and a lack of strategic rationale.

BAE shareholders' concerns include likely changes to BAE'sgenerous dividends and share buyback programmes, as well as theuncertainty posed by introducing French and German stakeholdersto the mix of BAE's business interests.

In the past three weeks, the rough outline of a deal firstbroached by chief executives Tom Enders of EADS and Ian King ofBAE has taken shape; under it, owners of EADS would have 60percent of the merged group and BAE shareholders 40 percent.

But there are heated negotiations between the threegovernments as they haggle over the details. France appears setto accept about a 9-percent stake in the new company with theGerman government, probably via a state bank, seeking parity.

But BAE and the British government want to limit Paris andBerlin to that and nothing more. They want a block on France orGermany buying more shares, or being able to appoint directors.

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

"Otherwise, Enders and King have signalled they will pullthe plug on the 10th."

Officials failed to resolve incompatible demands over stateinvolvement in a video conference on Friday. Britain's Hammondlater warned that London would block the deal if "red line"demands were not met, including an ability to cap the influencethe French and German governments would have on the new company.


EADS/BAE market cap, share price multiple



One issue hanging over the talks is that the United States,where BAE has 36,000 employees and works on top secret militaryprogrammes, might impose tougher restrictions on thoseoperations if it deems the European government stakes in the newcompany too high.

Such U.S. restrictions could prompt BAE to stop the deal.

British Prime Minister David Cameron faced a revolt withinhis own party when 45 members of parliament signed a letter lastweek asking him to bar France and Germany from the new company.

Ben Wallace, the lawmaker who organised the letter, said hewould visit Washington to find out how state stakes in the newcompany might affect BAE's U.S. businesses.

The merger comes as Airbus still faces thin margins on itsA380 superjumbo while needing to fund development of its newA350 model.

Sharp cuts in defence spending are bad news for both firmsbut especially BAE, which is heavily exposed to the U.S. defencemarket, by far the world's largest.

The British company is also facing a downturn in demand forlong-running programmes such as the Eurofighter Typhoon fighterjet as well as for equipment it supplies to U.S. forces nowplanning to withdraw from Afghanistan.

(Additional reporting by Tim Hepher, Kate Holton, AndreaShalal-Esa, Paul Taylor, Mohammed Abbas and Jason Neely; Editingby Peter Millership and Alastair Macdonald)

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

Keywords: EADS BAE/