Two of the world’s largest aerospace and defense contractors, Britain’s BAE Systems and the European Aeronautic Defence and Space Co. (EADS), yesterday confirmed that they are in discussions about a potential combination that would still leave both as separate publicly traded entities.
The combination, if it occurs, would result in the world’s largest aerospace and defense company and would have a significant global operational footprint, particularly in Europe and the United States. The two companies combined for $94.1 billion in sales last year.
A spokesperson for BAE’s U.S.-based business, BAE Systems, Inc., said in a statement that the merger would enable a larger pool of resources that would benefit U.S. government programs through innovation, research and development. The spokesperson also said that the combined entity would “look to drive cost efficiencies across BAE Systems, Inc. and EADS North America, which could facilitate more competitive pricing for the U.S. government.”
Boeing [BA], which is currently the largest aerospace and defense contractor in the world, had $68.7 billion in sales in 2011.
Jim McNerney, Boeing’s chairman and CEO, yesterday told Reuters that a merger between BAE and EADs would not threaten his company. Speaking to the news agency after a speech to the Council on Foreign Relations, McNerney said that the potential merger “does reflect a global consolidation that is beginning to happen.”
Boeing competes with both companies for international fighter and other defense business and with EADS on military transport and aerial refueling aircraft as well as for commercial passenger and cargo plane business.
Details of the possible merger are still being worked out but BAE said that the current thinking is that its shareholders would own 40 percent and EADS shareholders 60 percent the combined companies. BAE and EADS would each have their own boards and executive committees that would be overseen by a unified board and management structure at the larger corporate level.
Specific details are also scarce related to how shareholders of the two companies would benefit from a merger. BAE’s statement said that “both companies would operate as one group by means of equalization and other agreements” even though the two would remain listed on their existing stock exchanges.
BAE said that the shareholder and customer benefits “include cost savings, such as from procurement and sourcing efficiencies available to the enlarged group, and substantial new business opportunities.” The company also said that the merger would essentially bring together complementary businesses and “offers the opportunity of greater innovation, long-term financial stability, and an extended market presence, which will enable them to compete even more effectively on the world stage.”
If a merger does occur, EADS would pay its shareholders $322.1 million in dividends prior to completion of a deal to help achieve value equalization for its shareholders. Normal dividend payments by both companies would be unaffected in 2012 and in 2013 the combined entity would declare dividends so that BAE shareholders received an equivalent amount as they did in 2012, which “would represent a material increase for EADS shareholders,” BAE said.
In 2014 and beyond the dividend policy would be up to the unified board and take into consideration dividends to shareholders, future earnings potential, investment requirements and the need for a strong balance sheet.
Any agreement on terms of a merger would still have to be approved by the boards of EADS and BAE and a final merger would still have to clear a number of hurdles, including approvals by shareholders of both companies, and government and regulatory clearances in various countries, including the United States. The companies have already initiated discussions with a number of governments regarding the “implications of the potential transaction,” BAE said.
BAE noted that it and EADS have secure and sensitive defense businesses in the United States, Britain, France, Germany, Spain, Saudi Arabia, Australia and other countries. Both companies operate in the United States, although BAE has the lion’s share of the business here, generating $14.4 billion in sales, nearly half of the company’s total worldwide revenues.
By Oct. 10, the two companies either must announce their agreement to merge or not merge although that deadline can be extended. BAE said it plans to request an extension of the deadline if discussions with EADS are still ongoing at that time.
Deal terms would also account new special shares from both companies for the British, French and German governments to replace the U.K.’s existing share in BAE and France and Germany’s shares in EADS.
Currently, BAE and EADS partner on the Eurofighter combat aircraft and the MBDA missile development and production company.