UPDATE 6-EADS, BAE call off world's biggest arms merger

(Adds Hammond and additional quotes from King)

* Companies say they have ended talks

* Sources said Germany opposed the $45 billion aerospacemerger

* BAE shares down 1.14 per cent, EADS up 4.44 per cent By Sophie Sassard, Jason Neely and Kate Holton

LONDON, Oct 10 (Reuters) - EADS and BAE Systems called offthe world's largest defence and aviation merger on Wednesday,and pinned the blame on Germany for wrecking the $45 billiondeal.

BAE said it had become clear that the interests ofthe French, British and German governments could not bereconciled with each other or with the objectives that BAE andEADS established for the merger.

"BAE Systems and EADS have therefore decided it is in thebest interests of their companies and shareholders to terminatethe discussions and to continue to focus on delivering theirrespective strategies," BAE said in a statement.

BAE is a private British company, and its biggest customeris the U.S. military, accounting for nearly half its revenue.EADS, the Franco-German maker of Airbus planes, has a morecomplicated share structure, giving large influence to Germanand French industrial groups and the French state.

The merger hinged on the role of both the French and Germangovernments in the combined firm. In the end, it was Berlin,rather than Paris, that proved the problem.


Graphic on EADS/BAE market cap and share prices:

Factbox on the two companies:

Text of BAE/EADS statement


When asked if he had encountered more problems with theGerman than the French government, BAE CEO Ian King said: "Thatwould be an accurate representation."

"We had clear red lines that we were not willing to gobeyond relative to engagement and involvement of governments,"King told reporters in London.

"If that was going to impinge on our ability to commerciallyrun this new merged organisation, and support and develop ourexisting business, then we wouldn't go to that point, and thatis where we are today."

EADS said it was still not clear why Germany had objected.

"No firm reason has been given for the German opposition,"an EADS spokesman said. "I suggest you speak to them."


Securing such an enormous and complicated cross-border dealin a sector where commercial considerations are typicallytrumped by political, economic and national security concernswas always going to be desperately difficult.

"It is, of course, a pity we didn't succeed, but I'm glad wetried. I'm sure there will be other challenges we'll tackletogether in the future," said Tom Enders, EADS chief executive.

The companies had until 1600 GMT on Wednesday to declaretheir intentions and either scrap the merger, ask Britishregulators for more time or finalise their plans to create agroup employing nearly a quarter of a million people that couldbetter compete with U.S. rival Boeing .

A source close to the talks said the companies hadaccommodated all of Berlin's requests and were baffled as to whyChancellor Angela Merkel's government blocked the deal anyway.

"Germany blocked the deal, although all demands from theGerman side were met," the source said. "Top German negotiatorLars-Hendrik Roeller was the one who formulated all demands andsaid no in the end."

Roeller is Merkel's senior economic adviser.

Before the talks collapsed, several sources close to thedeal said Merkel opposed the proposal but they did not know why.

The German government did not immediately have any comment.

Sources said Germany had wanted parity with France in theshareholding of the new group, plus the basing of some companyheadquarters in the German city of Munich.

"France and the UK agreed that Germany have the samestakeholding as France in the merged group. Separately, vastguarantees were given regarding safeguarding national securityinterests, sites, jobs. The topic of headquarters was beingdiscussed very emotionally, but not an issue big enough to letthe deal fail," a source close to the transaction said.

French President Francois Hollande said the decision to endmerger talks lay with the companies, and his government'sintervention was limited to stating its conditions.

Britain has largely supported BAE's case that French andGerman influence would have to be reduced to make the deal work,especially given BAE's vast U.S. business.

"Our view is that for this company as a merged entity tohave been successful, it would have needed to be able to operateas a commercial company free of undue control or influence byany single government and that's something that the companyevidently has decided it is not able to achieve," BritishDefence Secretary Philip Hammond said.

A British source familiar with the deal also suggestedBerlin, rather than Paris, was the holdout.

"It was absolutely heading in the right direction," thesource said of the talks. "There was very significant (British)progress with France. There wasn't the same progress elsewhere."


At 1450 GMT BAE shares were down 1.14 percent at 321.7 pencein London, while EADS shares were up 4.44 percent at 27.270euros in Paris.

Brinkmanship is common in European negotiations. EADS -whose full title is the European Aeronautic Defence and SpaceCompany - was itself only created after talks about itsstructure collapsed and were resurrected weeks later.

Sean O'Keefe, chief executive of EADS North America,underscored that EADS remains committed to its goal of expandingits presence in the U.S. defence markets.

"The fact that this did not work its way to completion ...does not mean there will be any slowdown of any effort to lookmore broadly at other opportunities that may come along," hesaid.

The merger had faced growing unease from investors in bothcompanies who complained they were lacking information. Manypeople had bought shares in EADS on the strength of its growingAirbus civil unit, rather than its defence ambitions, while BAEinvestors were attracted by its dividend yield.

"While BAE's long-term prospects could still be quiteexcellent, the failed merger will leave the firm much moreexposed to uncertain factors beyond its control, such as majordeclines in the U.S. defence budget and potential losses in anincreasingly competitive international defence market," saidDavid Reeths, director of consulting at defence analyst IHSJane's.

BAE CEO King and Chairman Dick Olver said after the mergertalks ended that the company's dividend policy would continueand that it was not looking for a tie-up with another company.They also said management would be staying in place.

The British government holds a golden share in BAE thatallows it to block foreign takeovers.

Germany does not currently have a direct stake in EADS, butis represented by industrial ally Daimler AG , whichholds just over 22 percent. France holds an identical stake,split between the state and French publisher Lagardere. Daimler said it still aims to reduce its EADS stakethis year despite the failed merger talks.

Adding to the hurdles facing the deal, BAE's largestshareholder, fund manager Invesco Perpetual, with 13.3 percent,had said it was not convinced of the strategic rationale for thecombination.

A source with the Spanish government, which holds a 5.5percent share in EADS, said: "In the short term this guaranteesSpain's stake in EADS from being diluted, but of course a biglong-term opportunity has been lost."

(Additional reporting by Matthias Blamont, Arno Schuetze, PaulTaylor, Andrea Shalal-Esa, Tim Hepher, Mohammed Abbas, KateHolton and Paul Sandle; Writing by Will Waterman and PeterGraff, editing by Peter Millership)

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

Keywords: EADS BAE/