EADS, BAE fight lengthening odds to save merger

PARIS, Oct 10 (Reuters) - EADS and BAE Systems

are bracing for one last effort to breathe life into atroubled $45 billion aerospace merger as doubts grow over Germanbacking for the deal.

The European companies have until 1600 GMT later onWednesday to declare their intentions and either scrap theirmerger or ask UK regulators for more time or finalize theirplans to create the world's largest aerospace and arms group.

"We will keep going until 5 (o'clock pm London time)," aperson involved in the negotiations said.

Several sources close to the negotiations said GermanChancellor Angela Merkel had opposed the proposal to combineAirbus passenger airplanes with UK defence contractor BAE.

"Merkel is against the deal but has not given reasons," asource involved in the negotiations said.

A spokesman for the German government declined comment.

The setback scuppered plans for a statement before Europe'sstock markets open in which the groups had been expected toreport progress and ask for time to complete the deal.

Brinkmanship is common in European negotiations andFranco-German-led EADS was itself only created after talks aboutits structure actually collapsed only to be resurrected weekslater.

But with the current negotiations taking place in a glare ofpublicity, the margin for manoeuvre was rapidly dwindling.

Talks have gone back and forth over the last month.

On Tuesday, French Defence Minister Jean-Yves le Drian saidnegotiations on the merger had moved forward.

"We had made a lot of progress, I think, but have weprogressed enough? That is up to those who initiated the projectto say," the minister said.

But by late that evening it appeared that there were threelines drawn in the sand, each of which excluded one of theBritish, French and German governments, leaving the highlypolitical European merger in danger of collapse.

France and Germany want to keep a strong say in the combinedcompany while Britain wants to protect BAE from state ownershipwhich could affect its contracts in the United States.

Germany and Britain could accept lower state shareholdingsthan is the case at EADS which is more than half controlled byFrance, Germany and Spain. But France rejects that.

France and Britain, meanwhile, could accept unequal stakesbetween France and Germany but Berlin demands parity. Sourcesinvolved in the deal said Germany also wanted to ensure therewas a major headquarters in Munich to counter corporate centresin Toulouse, France and Farnborough, Britain.

Under rules set by the UK Takeover Panel, EADS and BAE canask for an extension to their negotiations but only if EADS "hasevery reason to believe that it can and will continue to be ableto implement the offer."

Negotiators described the atmosphere as tense and frustratedas bickering immediately broke out behind the scenes to lay theblame elsewhere in case the talks officially broke down.

The merger has faced growing unease from investors in bothcompanies who complained they were ill-prepared and lackinginformation. Many people bought shares in EADS on the strengthof its Airbus civil unit, rather than its defence ambitions,while BAE investors were attracted by its dividend yield.

(Reporting by Tim Hepher)

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

Keywords: EADS BAE