EADS, BAE fight lengthening odds to save merger

PARIS, Oct 10 (Reuters) - EADS and BAE Systems

are bracing for one last effort to breathe life into a troubled $45 billion aerospace merger as doubts grow over German backing for the deal.

The European companies have until 1600 GMT later on Wednesday to declare their intentions and either scrap their merger or ask UK regulators for more time or finalize their plans to create the world's largest aerospace and arms group.

"We will keep going until 5 (o'clock pm London time)," a person involved in the negotiations said.

Several sources close to the negotiations said German Chancellor Angela Merkel had opposed the proposal to combine Airbus passenger airplanes with UK defence contractor BAE.

"Merkel is against the deal but has not given reasons," a source involved in the negotiations said.

A spokesman for the German government declined comment.

The setback scuppered plans for a statement before Europe's stock markets open in which the groups had been expected to report progress and ask for time to complete the deal.

Brinkmanship is common in European negotiations and Franco-German-led EADS was itself only created after talks about its structure actually collapsed only to be resurrected weeks later.

But with the current negotiations taking place in a glare of publicity, the margin for manoeuvre was rapidly dwindling.

Talks have gone back and forth over the last month.

On Tuesday, French Defence Minister Jean-Yves le Drian said negotiations on the merger had moved forward.

"We had made a lot of progress, I think, but have we progressed enough? That is up to those who initiated the project to say," the minister said.

But by late that evening it appeared that there were three lines drawn in the sand, each of which excluded one of the British, French and German governments, leaving the highly political European merger in danger of collapse.

France and Germany want to keep a strong say in the combined company while Britain wants to protect BAE from state ownership which could affect its contracts in the United States.

Germany and Britain could accept lower state shareholdings than is the case at EADS which is more than half controlled by France, Germany and Spain. But France rejects that.

France and Britain, meanwhile, could accept unequal stakes between France and Germany but Berlin demands parity. Sources involved in the deal said Germany also wanted to ensure there was a major headquarters in Munich to counter corporate centres in Toulouse, France and Farnborough, Britain.

Under rules set by the UK Takeover Panel, EADS and BAE can ask for an extension to their negotiations but only if EADS "has every reason to believe that it can and will continue to be able to implement the offer."

Negotiators described the atmosphere as tense and frustrated as bickering immediately broke out behind the scenes to lay the blame elsewhere in case the talks officially broke down.

The merger has faced growing unease from investors in both companies who complained they were ill-prepared and lacking information. Many people bought shares in EADS on the strength of its Airbus civil unit, rather than its defence ambitions, while BAE investors were attracted by its dividend yield.

(Reporting by Tim Hepher)

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

Keywords: EADS BAE