Ambitious French minister's grand plan to merge EADS and Thales faces many hurdles
Nicolas Sarkozy's vision of a French-run European aerospace champion - melding EADS and Thales in the industry's biggest merger since EADS itself was created - faces an array of political, financial and regulatory obstacles that make Hercules' 12 tasks appear easy.
Last week, the man who would be French president - who leaves his post as finance minister at the end of the month - came clean on his ambitions to steer a union of EADS and Thales, ranked one and three in Europe, by striking a deal with two of Thales's key French shareholders, Alcatel and Dassault.
But he had to water down his enthusiasm after meeting his German opposite number last week. Central to Berlin's concern over an EADS and Thales merger is that French interests would have a majority in the new company and upset the complex, delicate split between the two countries established when the European giant was set up four years ago. Less than half of Thales stock is publicly floated, with the French government holding 31%, while the French government and Lagardère control just under a third of EADS. Germany has 31% of EADS through DaimlerChrysler. Sarkozy said last week that "whatever happens at EADS, we both have a duty to maintain the equilibrium of this partnership".
But there are many other hurdles too, not least convincing Thales managers and stakeholders such as Lagardère that a merger makes sense, as well as persuading the UK - Europe's biggest military spender - that having just two prime contractors in Europe, would not stunt competition.
A final problem on the civil side would be US and even European Commission objections to EADS's 80% subsidiary Airbus bundling Thales technology into its programmes and shutting out rival avionics suppliers. The EC's stand on a similar issue scuppered the proposed General Electric and Honeywell merger in 2001. If EADS and Thales, as they exist today, were merged, they would overtake Boeing as the industry's largest player, with revenues, based on 2003 sales figures, of some $52 billion. However, hiving off Thales' civil avionics and information technology and services operations - about 37% of its business - would be a likely option. The fact that Alcatel and Dassault would be in the running to acquire these bits of Thales is one of the carrots Sarkozy is dangling to win their backing.
Although Philippe Camus, EADS co-chief executive, last week insisted there was "nothing on the agenda" on a merger, the company has made clear it wants to grow its defence business, particularly its defence electronics and systems segments. A Thales merger would be an instant if imperfect solution.
Whether business logic or political ambition is driving these merger approaches is uncertain. Lagardère and DaimlerChrysler have made clear that they will consider selling their EADS stakes after the A380 goes into service. The consensus has been that their shares would be floated, leading to independent shareholders owning EADS. When and if this happens, politicians will be in a considerably weaker position when it comes to influencing the destiny of Europe's biggest aerospace player.
Hurdles to a merger
* German worries over French balance of power
* Threat to defence competition for UK
* US (EC?) concerns over Airbus/Thales bundling
* Sheer financial, political and regulatory complexity
Benefits of a merger
* Create European champion in defence
* Reduce EADS dependence on Airbus
* Increase EADS's foothold in US defence market
* Synergies between platforms and electronics
MURDO MORRISON / LONDON
Source: Flight International
