Relief for region if European aerospace deal collapses

BAE's defence business is under scrutiny with cuts in defence budgets of countries such as the United States. Chris Ratcliffe / Bloomberg News

It was hailed as the aerospace deal of the decade, but it looks increasingly unlikely that the merger between the British defence company BAE Systems and the European giant EADS will go ahead.

The UAE, and the GCC in general, should muster an enthusiastic round of applause if the deal falls apart, because by most reckonings a link-up between the two companies would be bad news for the country and the region.

You do not have to be a rabid British euro-phobe to see the flaws in the proposed merger. Far more moderate people, such as those at the Invesco Perpetual investment institution that owns 13 per cent of BAE, have decided that they do not like the deal.

Other shareholders share Invesco's doubts, and with that kind of opposition, it seems virtually certain the planned merger, which would create a €70 billion (Dh332.51bn) giant to take on American rivals such as Boeing and Lockheed, will not get off the ground.

All that is before the British government decides whether to block the deal by exercising its "golden share" in BAE, in effect playing a super-trump card that beats any shareholder vote.

In the current climate of open hostility between Britain and the European Union, where a British exit is increasingly a likely outcome, the British government must be very tempted indeed to play its ace.

The rationale for the deal in the first place was the pressure both BAE and EADS are facing in the global aerospace industry.

At a time when cuts in defence budgets in the United States and elsewhere are putting BAE's main business under greater scrutiny, the thinking was that a link-up with EADS (the manufacturer of the Airbus) would bolster both corporations, and allow the new entity to take on Boeing, which is itself an integrated defence and civil aviation business.

There might be some logic to that way of thinking. Airbus's steady stream of orders would help to iron out the cyclicality in BAE's defence revenues, while the merged business would have the clout to take on US defence contractors around the world. So far, so good.

But even as the deal's architects were expounding its values, doubts immediately arose about the structure of the proposed merger.

Reflecting the bigger market capitalisation of EADS, a 60-40 per cent split was agreed. What has alarmed the British authorities and shareholders, however, was that a large portion of that 60 per cent was in the hands of the German, French and Spanish governments.

Such a high level of European government involvement in the merged company would have risked BAE's favoured status in American defence business and (perhaps) put British jobs at risk in the event of business downturn.

GCC states have a vital strategic interest in the outcome of the merger. Not only are they a big market for the multibillion-dollar defence trade and customers to both BAE and American military suppliers, but they also provide a key market for future Airbus deliveries.

Airbus's juicy forward order book of €485bn would be much more slender without the interest of Emirates Airline, Etihad Airways and Qatar Airways in the aircraft. Orders from the fast-growing airlines of the Middle East account for at least a third of that total.

It has been argued by apologists for the merger that it is to the GCC's benefit to have a one-stop-shop arrangement with the combined BAE/EADS entity. But the problem with one-stop shops is that the shopkeeper has a captive clientele that will have to pay the asking price.

Reduced price competition would force GCC states to pay more, or drive them into the arms of American manufacturers, increasing their dependency on US suppliers, which is not a desirable outcome from a business or political viewpoint.

We will probably know in the next 24 hours or so if the deal will go ahead, with rulings expected from British takeover authorities and perhaps the United Kingdom's government.

If, as many experts now believe is likely, the deal gets blocked, the GCC can breathe a sigh of relief and get on with its normal business.