Wires

TEXT-Fitch: EADS, BAE deal failure shows challenges in consolidation

(The following statement was released by the rating agency)

Oct 10 () - Today's announcement that BAE Systems

and EuropeanAeronautic Defence and Space Company

(EADS) are terminating theirmerger talks is not surprising, Fitch Ratings says. It shows there is littlechance of significant consolidation in the sector in the medium term. There isno immediate rating impact on either company from the announcement, as we haddoubts about the potential for a successful deal.

The government shareholder disagreements about the shareholder structure of themerged entity - and the influence each was to exert over the new company - thatled to the collapse of the talks demonstrate the deep divisions in Europeregarding strategically and industrially important defence and technologyassets. They indicate how difficult, politically and financially, it is to winover the numerous stakeholders involved in such mergers.

Such divisions are central to the challenges faced by the industry in itsefforts to boost scale and operational efficiencies, despite the often soundindustrial logic of tie-up proposals. We believe such obstacles are likely toremain a permanent feature of the sector in light of its inherent securitysensitivities. Therefore, we expect little change to the make-up of the industryin Europe in the medium term.

The failure of the merger does not increase our concern about the broaderoutlook for top-tier European defence companies, and their ability to cope in aclimate of long-term low local defence spending and increasingly competitiveexport markets. Broad geographic and product diversification and relativelyflexible cost structures are likely to offset structural industry headwinds.

The above article originally appeared as a post on the Fitch Wire credit marketcommentary page. The original article can be accessed at

.

All opinions expressed are those of Fitch Ratings.

(New York Ratings Team)

((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging:pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))