Array of concerns soured Germans on defence mega-merger

* EADS, BAE call off talks on $45 billion mega-deal

* Partners blame Germany for blocking defence giant

* Berlin came to see deal as too complex, risky

* Fears of domestic backlash also played role

By Noah Barkin and Andreas Rinke

BERLIN, Oct 10 (Reuters) - Concerns about the fate of Germanproduction sites, the reaction of investors and the symbolism ofcreating a giant military firm in a country with deep pacifiststrains turned Angela Merkel against the European defence mergerthat collapsed on Wednesday.

EADS , the Franco-German parent of jetmaker Airbus,and British defence group BAE Systems announced afterweeks of intense talks they were abandoning plans for a $45billion deal that would have created an aerospace and defencegiant bigger than Boeing .

Bankers involved in the deal, officials in Paris and at EADSall blamed Germany for the failure, saying Berlin had beenoffered crucial concessions in the final days of thenegotiations, only to quash it nonetheless.

The German government has rejected that narrative. Officialsin Berlin, many speaking on condition of anonymity, paint a morenuanced picture, without hiding their ultimate verdict - thatthe deal made little sense.

The officials said initial enthusiasm for the deal and EADSchief Tom Enders' plan to give the German, French and Britishgovernments golden shares in the combined group gave way todoubts when the French, who own 15 percent of EADS, insisted onretaining a substantial stake.

Fearful that German know-how, jobs and plants would becompromised, Berlin decided it needed to keep parity with Parisin order to defend its interests.

But behind the scenes German officials - especiallyChancellor Merkel's Free Democrat (FDP) coalition partners -remained leery about buying a substantial stake in the firm, twosenior German sources said.

They were convinced that the new group would be penalised inthe U.S. market - where BAE enjoys privileged status - if theFrench and German governments took big shares, and that sales ofcivil jets to countries like China and Indonesia could suffer asa result.

Officials in Berlin also worried about the sharp fall inEADS shares that occurred when news of the secret negotiationsleaked in mid-September, and the reservations of the big privatestakeholders, including German carmaker Daimler andFrench media group Lagardere .

"We started asking ourselves, does this deal really makesense," said one senior German official. "The market went down,investors were against it, the synergies were unclear, as wasU.S. market access with the big state shareholdings."


Compounding the doubts was growing unease with the idea ofturning EADS, which is seen by most Germans as a civil aerospacefirm despite its military interests, into a huge defence concernby bringing in BAE.

Defence exports are already a controversial issue inGermany, a country where many people remain uneasy aboutmilitary trade nearly 70 years after World War Two ended.

The risk-averse Merkel, who faces an election one year fromnow, and her entourage had concerns about how the deal would godown domestically, sources acknowledged.

"This would have created the biggest defence company in theworld," said a second source close to the chancellor. "Butdefence is an especially sensitive subject in Germany."

The complexity of having three different governmentsinvolved also gave the Germans pause, but ultimately they say,the different parties were unable to resolve the shareholdingissue to everyone's satisfaction.

Paris wanted to retain the option of going up to 13.5percent by buying the stake held by Lagardere at a later date.German officials insisted they be able to follow suit.

But the British wanted a cap of 10 percent each, concernedthat the Germans and French could approach a blocking minorityif they went above that level.

As a Wednesday deadline approached for deciding whether toextend the talks or end them, the Germans determined the riskswere too high, and that further negotiations would only prolongthe agony.

When EADS and BAE came out and announced the deal was off,instead of expressing regret, Berlin's coordinator for aerospacePeter Hintze made clear what the government had come to believein the final weeks of talks that Germany's interests were "bestguaranteed" by sticking with the status quo.

"We had reservations about the deal but so did the others,"the first official said. "Everyone had their red lines, everyonewanted the headquarters. When the question came of whether toextend the talks or not, we thought the negatives outweighed thepositives."

(editing by Janet McBride)

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