Wires

"Major Tom" brought to earth as Merkel says 'Nein'

By Jason Neely

LONDON, Oct 10 (Reuters) - Tom Enders was flying high sixweeks ago; newly elevated to the top job at Europe's EADS, hissecret merger deal to create the world's biggest aerospace groupand rid himself of burdensome government meddling was preparingfor launch.

But when "Major Tom", a pugnacious paratroop officer in theGerman army reserve, took off to go hang-gliding in late August,things began to go wrong. A painful crash that left his armsstrapped up, robot-style, kept him only briefly from work; butit prevented him flying with Chancellor Angela Merkel on a tripto China where he might have hoped to win her as an ally.

In the end, it seems unlikely even the most persuasive ofher countrymen would have stopped Merkel shooting down the planto merge with British defence contractor BAE Systems, which thefirms pulled on Wednesday after governments failed to agree.

But the tale of Enders' untimely fall to earth will stand asan image of how his daring bid to break the Airbus manufacturerfree of political interference was brought down by exactly thekind of diplomatic turbulence he had hoped to put behind him.

Within a couple of weeks of his accident, word of the$45-billion merger talks leaked, triggering a regulatorydeadline in Britain to wrap up a deal by Wednesday; anill-tempered free-for-all broke out among ministers in Paris,Berlin and London as well as corporate and institutionalshareholders, many of them suspicious that Enders had beenkeeping them in the dark.

Yet although the 53-year-old launched the idea with BAEChief Executive Ian King in total secrecy in May, shortly beforesucceeding Frenchman Louis Gallois as CEO of European AeronauticDefence and Space Co. on June 1, the straight-talking Enders hadnever hidden his disdain for a corporate structure designed toprotect national interests after a messy marriage 12 years ago.

A particularly vocal public row a couple of years ago whenEnders demanded more government backing up front for EADS' newmilitary transport aircraft, the A400M, had won him few friendsin politics, not least among his fellow Germans. And he kept onthe offensive over the past year about those state holdings.

These clipped EADS' wings, he argued, when it needed to flyfree to compete, notably with American arch-rival Boeing.

Addressing investors' doubts, he acknowledged during apresentation in London: "This will not go down in history as thedeal with the most cost synergies."

Rather, as he wrote to employees of the group whose painfulcreation he witnessed at first hand in 2000, the merger wouldliberate EADS from constraints built into it at birth: "If wesucceed and if the EADS shareholder pact can be dissolved, ourgovernance will be significantly simplified and 'normalised'."

POLITICAL CROSSWINDS

In the end, some will see an irony in that it was this veryweb of interlinked and competing European interests that broughtdown his plan, codenamed Hawthorn, to bring together Elm - as inE for EADS - and Birch - BAE - its partner in the Eurofighterjet and a big supplier of military hardware to the Pentagon.

Though there was also scepticism among private shareholders,who questioned the benefits of the complementing airliners withweaponry in the combined group, it was crosswinds from politicalleaders that downed the talks before any merger deal was ready.

French and British officials said their differences, onceseen as the toughest to overcome, had been settled; London hadaccepted a continued French state shareholding and Paris agreedto limits it had sought to avoid. They both pointed to Berlin,where Merkel and her ministers kept stony silence, as theprincipal naysayer when time ran out for talks on Wednesday.

"It's a German government decision," one French officialsaid. "It's a great shame, because ... we had made progress.

"It would seem that the chancellor does not want thediscussions to continue."

In London, a source said: "It was absolutely heading in theright direction ... There was very significant progress withFrance. There wasn't the same progress elsewhere."

The German government, which unlike France is not directly ashareholder had, sources said, been offered parity with Paris inany combined group - something it wanted since carmaker Daimlerhas been looking to give up the biggest German stake in EADS.

While others felt Berlin was offered good terms, including astake in the firm and guarantees of jobs and office locationsgoing to Germany, sources in the German government said a rangeof factors had soured Merkel on Enders' proposals. Those rangedfrom questions over the business logic and fears of damagingsales by possibly increasing state involvement to discomfortwith involving Germany, still scarred by its militarist past, inwhat would become the world's biggest armaments manufacturer.

As once source close to Merkel said: "Defence is anespecially sensitive subject in Germany."

A London hedge fund manager, who profited from the collapseof a plan that had depressed EADS shares and boosted BAE's,reckoned Enders had been fighting a losing battle from thefirst: "It proves that you can try to take the politics out ofEADS," he said. "But you can never take EADS out of politics."

SECRET TALKS

There were those who felt the managements' miscalculationhad been in the very secrecy they hoped to maintain until a dealcould be worked out away from the glare of public politicking.

A source close to the Spanish government, which also has astake in EADS, told Reuters: "The fact that they tried to handlethis deal behind the backs of the governments, who are the mainshareholders, was a major error."

Enders' position may now be questioned and EADS's ownershipstructure may in any case face a major shake-up as Daimler andFrench conglomerate Lagardere try to sell out, disrupting acomplex and partly secret set of internal pacts.

The CEO, who has relished publicity stunts like jumping outof his own firm's new military transporter from 12,000 feet, maynow look back on where things went sour in talks that one sourceinvolved described as starting as "a bit of banter" betweenEnders and King.

Within weeks of taking over the top job, that vague ideaturned into a serious project in early July during a meeting atLondon's City Airport among a small group from both firms.

Later that month, wider discussions including lawyers andbankers sketched out a plan that would fix the share of EADSinvestors in the combined group at 60 percent and BAE at 40.

Over the summer, government officials were getting involved- though not quickly enough for the liking of some ministers.

And the corporate teams were caught off guard when, on Sept.12, just two weeks after the hang-gliding accident had disruptedEnders' plan for an Airbus-centred trip to China with Merkel,the news of the talks leaked and Britain's takeover regulatorset a 30-day clock ticking for them to make shareholders anoffer - or show justification for extending the timetable.

In the end, it was clear that, for now at least, it was adeal that wouldn't fly.

(Additional reporting by Sophie Sassard, Sinead Cruise, TimHepher, Adrian Croft, Gernot Heller and Elizabeth Pineau;Writing by Alastair Macdonald, editing by Peter Millership)

((jason.neely@thomsonreuters.com)(0207 542 8825)(ReutersMessaging: jason.neely.reuters.com@reuters.net))

Keywords: EADS BAE/END