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BAE Systems Shares Soar After Merger Agreement With EADS

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European Aeronautic, Defence & Space Co (EADS) and London-based BAE Systems plc (LON:BA) are in talks to combine the two companies, Bloomberg TV reported. The discussions have reached advanced stages, and they somehow want to maintain their independence, even after the transaction, so that they can fetch contracts from the U.S. defense market, people familiar with the developments told Bloomberg. EADS, the parent company of Airbus, and BAE Systems plc (LON:BA) just confirmed officially that they are in merger talks.

BAE Systems Shares Soar After Merger Agreement With EADS

If the two companies are merged, they will be a big threat to U.S. heavyweights Boeing and Lockheed Martin. BAE Systems plc (LON:BA) currently has a market value of $16.1 billion (10 billion pounds). The deal wouldn’t be a big surprise, as the two companies already co-operate on Eurofighter jets. BAE Systems earlier had a stake in Airbus, but it sold the shares to focus on its defense business.

Under the proposed deal, EADS NV (EPA:EAD) shareholders will own 60 percent of the newly formed company, while the remaining 40 percent will be controlled by BAE Systems shareholders. The market value of the combined company will be about $50 billion. The European giants said in a joint statement that the merger will create new opportunities and lead to cost savings. EADS has decided to pay $322 million to its shareholders, in order to align its dividend payments with that of BAE Systems.

BAE Systems is going though a rough patch after it turned its focus completely on defense. A Morgan Stanley research report says there is a lack of growth for the company, especially under uncertain defense budgets. BAE was formed in 1999, after the merger of British Aerospace Plc and Marconi Electronic Systems division of GEC.

Soon, the other European aerospace companies such as Dasa, France’s Aerospatiale Matra SA, and Spain’s Construcciones Aeronauticas SA came together to form EADS NV (EPA:EAD).

After the announcement, BAE Systems shares jumped 10.6 percent to 360.80 pence in London trading, while EADS NV (EPA:EAD) plunged 5.6 percent in Paris. The Boeing Company (NYSE:BA) is down 0.2 percent, whereas Lockheed Martin Corporation (NYSE:LMT) is up 0.7 percent on Wednesday so far.

In other airline news, RBC Capital Markets report,  speaking on the sidelines of the ILA Berlin Air Show, Airbus CEO Fabrice  Bregier said that it will be difficult to reach 2012 A380 goals due to the effects of wing cracks. “We have a target of 30 aircraft but we probably will have some difficulty reaching it,” he said, following similar comments by Airbus COO for Customers John Leahy and EADS CEO Tom Enders. Separately, AirAsia, which is reportedly near another 100 aircraft narrowbody order, announced it will be the first Asian operator to employ Airbus’s new sharklets. The bent wing tips are supposed to save fuel and have been available on new aircraft since April.

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