UPDATE 3-EADS-BAE merger plan hits political crunch point

* EADS, BAE deny report talks blocked

* Shift in Oct. 10 deadline not ruled out

* New hurdle over future status of core shareholders

* Shares in both companies edge higher

(Recasts, adds details) By Tim Hepher and Christiaan Hetzner

PARIS/FRANKFURT, Oct 5 (Reuters) - Talks over a European supermerger between EADS and BAE Systems reached a political crunch point on Friday as Britain, France and Germany attempted to narrow differences on a $45 billion proposal to create the world's largest aerospace and arms group.

Europe's two largest aerospace groups headed into the weekend with the fate of their planned merger hinging on a high-level accord over state shareholdings in the group. Time is running out before a UK deadline of Oct. 10 for a deal.

EADS and BAE denied a report by Germany's Der Spiegel magazine that the talks had collapsed.

"We have been informed by the governments about the status of the discussions, but in no way have we been told that the deal is off," a spokesman for Airbus parent EADS said.

"We continue to work towards the Oct. 10 deadline that we have been given by the UK government," he added.

Der Spiegel reported in its online edition that Britain, France and Germany, whose approval is necessary for the record aerospace merger to go ahead, had failed to agree.

A French government source described the report as "unfounded". German officials declined to comment.

A number of potential stumbling blocks have emerged since the proposed tie-up was announced last month. These include conflicting political interests in Britain, France and Germany, as well as some shareholders' dissatisfaction with the terms.

Germany is holding out for the same role as France, which would hold 9 percent in the new group, and wants to host the headquarters. This has put it at odds with EADS, which wants minimum political interference.

A new stumbling block emerged overnight as Reuters reported that negotiators were seeking ways to avoid a revival of state interference should governments buy shares in the future.

France has a 15 percent stake in EADS and under current arrangements could buy out industrial partner Lagardere, the French media firm which wants to sell its 7.5 percent stake.

Britain in particular wants France to forego that right in order to make the deal more presentable to authorities in the United States, where BAE earns nearly half of its revenue.

"Everyone is trying to inch forward to a position of comfort on this (point), but you can expect a few convulsions along the way," said a person involved in the negotiations. "You don't want a situation where governments feel that if more shares become available, they can go ahead and buy them."

The Spiegel report said France's refusal to back down on this point had brought the talks to a point of collapse.

A French-based source called the reported comments a negotiating tactic.


EADS is controlled by a pact between the French state and two core industrial shareholders, Lagardere and German carmaker Daimler. The trio collectively own 45 percent.

EADS wants to scrap the pact in order to rid the company of special interests and give it "normalised" corporate governance.

The priority for Britain is to ensure that the deal is as watertight as possible against any objections from the United States, where it will be subject to a thorough review.

A dose of political brinkmanship had been widely expected as the talks inch towards a conclusion. Until political progress is made, the companies are unwilling to release pressure for a deal by asking for an extension of the British Oct. 10 deadline.

Cautious provisions for a 1-2 week delay have been made internally at EADS with alternative dates for union briefings.

The wait means another frustrating weekend for minority investors who have demanded details of the proposal to create an aerospace and arms company to rival the U.S. giants.

"As far as we are concerned, there's been no attempt to explain the rationale for the deal to investors," said Barry Norris of Argonaut Capital Partners, an EADS investor. "This is one of the worst ever proposed mergers I have ever seen."

Shares in both companies edged 1-2 percent higher, clawing back part of the double-digit losses EADS has in particular sustained since the talks became public last month.

On Thursday, Britain and France appeared to be moving closer towards accepting a deal while Germany's position remained unchanged, but negative press leaks on both sides have ignited a

blame game in the event the talks break down.

"The decision is now at the highest level. It may be settled between (French President Francois) Hollande and (German Chancellor Angela) Merkel," a French parliamentary source said.

(Additional reporting by Gernot Heller, Emmanuel Jarry, Kate Holton, Reuters bureaus, Reuters bureaus; Editing by David Stamp)


Messaging: ann.chambers.reuters.com@reuters.net))

Keywords: EADS BAE/