[h=3]By MATTHEW CURTIN And HERBERT RUDE[/h]PARIS—Airbus parent European Aeronautic Space & Defence Co. has left its minority shareholders cold with its plan to boost its exposure to the politically sensitive defense sector via a merger with BAE Systems PLC.
EADS and the U.K.'s BAE said Wednesday they are in advanced merger talks to create the world's largest aerospace-and-defense company by revenue, leapfrogging U.S. rivals, though they cautioned the discussions could still fall apart. The combined entity would have a market valuation of nearly $50 billion and revenue of about $90 billion.
Investors reacted swiftly on Thursday: Shares in EADS fell sharply in early trading, while those in BAE gave up much of their gains Wednesday after news of the deal broke.
With the merger talks still under way, analysts questioned the business logic of the tie-up for EADS shareholders, and noted the risks should the deal fall apart, even though the companies appear to be a good fit on paper. EADS is strong in civil aerospace through Airbus, potentially complementing BAE's strong defense focus across air, land and marine weapons systems.
"Whilst EADS has plenty of cash, we doubt if doubling up on defense at this point makes sense to shareholders," said Robert Stallard, an analyst at RBC Capital Markets.
ReutersAirbus parent EADS and BAE Systems already work together on the Eurofighter Typhoon, above.
Bloomberg NewsAn Airbus A380-800 aircraft belonging to Emirates Group last month.
A deal could intensify competition for shrinking military spending by Western governments and rising military investments in the Middle East and parts of Asia. It also would heighten the competition in commercial jetliners between Airbus and U.S. rival Boeing Co.
BAE investors may have their reservations too because EADS shareholders would have a 60% stake in the merged group, limiting its ability to work for the U.S. government in sensitive areas such as cybersecurity given its range of interests from different nations, said Mr. Stallard.
As negotiations continue about how exactly the two companies would be combined, neither EADS nor BAE have disclosed exactly how they would cut costs and boost revenue through the merger.
Cost synergies might be limited because there is relatively little overlap between the two companies. The combination at a time of shrinking defense budgets in the U.S. and Europe makes it hard to see how much extra growth they might eke out of their existing military operations.
"The deal would [likely] do little to change the growth potential of the individual legacy businesses," said Benjamin Fidler, an analyst at Deutsche Bank. "Synergies would thus be the only real source of value upside from the deal."
Yet EADS and BAE might struggle to match the degree of cost savings of previous European defense mergers, such as Sagem and Snecma, and BAE and GEC-Marconi, Mr. Fidler said.
Some analysts said the merger did make sense given the pressure on defense budgets on both sides of the Atlantic.
"EADS always wanted to become less dependent on the civil business," DZ Bank analyst Markus Turnwald said. Consolidation in the defense sector is to be expected in view of shrinking defense budgets of European countries, he added.
Write to Matthew Curtin at [email protected] and Herbert Rude at [email protected]
EADS and the U.K.'s BAE said Wednesday they are in advanced merger talks to create the world's largest aerospace-and-defense company by revenue, leapfrogging U.S. rivals, though they cautioned the discussions could still fall apart. The combined entity would have a market valuation of nearly $50 billion and revenue of about $90 billion.
Investors reacted swiftly on Thursday: Shares in EADS fell sharply in early trading, while those in BAE gave up much of their gains Wednesday after news of the deal broke.
With the merger talks still under way, analysts questioned the business logic of the tie-up for EADS shareholders, and noted the risks should the deal fall apart, even though the companies appear to be a good fit on paper. EADS is strong in civil aerospace through Airbus, potentially complementing BAE's strong defense focus across air, land and marine weapons systems.
"Whilst EADS has plenty of cash, we doubt if doubling up on defense at this point makes sense to shareholders," said Robert Stallard, an analyst at RBC Capital Markets.
ReutersAirbus parent EADS and BAE Systems already work together on the Eurofighter Typhoon, above.
Bloomberg NewsAn Airbus A380-800 aircraft belonging to Emirates Group last month.
A deal could intensify competition for shrinking military spending by Western governments and rising military investments in the Middle East and parts of Asia. It also would heighten the competition in commercial jetliners between Airbus and U.S. rival Boeing Co.
BAE investors may have their reservations too because EADS shareholders would have a 60% stake in the merged group, limiting its ability to work for the U.S. government in sensitive areas such as cybersecurity given its range of interests from different nations, said Mr. Stallard.
As negotiations continue about how exactly the two companies would be combined, neither EADS nor BAE have disclosed exactly how they would cut costs and boost revenue through the merger.
Cost synergies might be limited because there is relatively little overlap between the two companies. The combination at a time of shrinking defense budgets in the U.S. and Europe makes it hard to see how much extra growth they might eke out of their existing military operations.
"The deal would [likely] do little to change the growth potential of the individual legacy businesses," said Benjamin Fidler, an analyst at Deutsche Bank. "Synergies would thus be the only real source of value upside from the deal."
Yet EADS and BAE might struggle to match the degree of cost savings of previous European defense mergers, such as Sagem and Snecma, and BAE and GEC-Marconi, Mr. Fidler said.
Some analysts said the merger did make sense given the pressure on defense budgets on both sides of the Atlantic.
"EADS always wanted to become less dependent on the civil business," DZ Bank analyst Markus Turnwald said. Consolidation in the defense sector is to be expected in view of shrinking defense budgets of European countries, he added.
Write to Matthew Curtin at [email protected] and Herbert Rude at [email protected]