Germany’s federal government is voicing serious concerns internally about the planned merger of and . A Ministry of Economics and Technology report, destined for the federal parliament’s economics committee, points to a series of issues that puts the proposal’s viability in question.
Germany, France and the U.K. have to approve the proposed transaction and have been looking at the implications for several weeks even before the plans became public earlier this month. French President Francois Hollande, German Chancellor Angela Merkel and U.K. Prime Minister David Cameron have been discussing the issue with each other over the weekend, but have provided no clear guidance as to where they are heading.
The Ministry of Economics report says the proposed golden shares, which are supposed to give governments veto rights on key strategy questions, are not absolutely certain to provide the kind of protection to state interests that EADS and BAE Systems claim The ministry also questions whether the issuance of golden shares to three governments complies with European law and would be confirmed in possible legal proceedings.
The government also says it is not content with the proposed 60% of shares that EADS would hold in the new company. “The true value, which is closer to 70/30, is not reflected correctly,” according to the report. That is also a financial concern because Germany is in the process of acquiring a 15% stake in EADS through its KfW state development bank. That transaction is made “significantly more difficult,” the ministry says, and could be delayed. KfW had planned to buy the 7.5% from Daimler and an additional 7.5% from a consortium of banks before the year-end. France currently holds 15% of EADS, but that would be diluted to about 9% if the merger goes ahead. The French government has said it would not sell that stake any time soon.
EADS shares have lost about 13% of their former value since the plans to merge with BAE Systems were confirmed.
The ministry’s report also outlines that EADS has proposed limiting individual shareholders to stakes of no more than 15%.
It goes on to say there are doubts that the transaction makes economic sense. The paper highlights shrinking defense budgets in almost all Western countries. It was also difficult to estimate the potential synergies a deal would facilitate. It also voices concerns about the strong bargaining leverage a combined EADS/BAE Systems group would have over its customers, including governments.
The report is the first official document that lists Germany’s concerns about the merger. A ministry official says, however, that the document is only a status report and that it is premature to draw conclusions.
Governments must come to an agreement on the biggest merger ever in the aerospace industry before a London stock exchange deadline expires Oct. 10. Otherwise, the companies would have to ask for an extension, which would be seen as a setback.