Response to share price movement

The discussions between the parties envisage that BAE Systems shareholders would own 40% and EADS shareholders 60% respectively of the enlarged group. It is contemplated that there would be a unified board and management structure with identical boards and executive committees at each of BAE Systems and EADS.

BAE Systems and EADS have a long history of collaboration and are currently partners in a number of important projects, including the Eurofighter and MBDA joint ventures. The potential combination would create a world class international aerospace, defence and security group with substantial centres of manufacturing and technology excellence in France, Germany, Spain, the UK and the USA.

BAE Systems and EADS operate highly secure and sensitive defence businesses in the USA, the UK, France, Germany, Spain, Saudi Arabia and Australia, amongst other countries. Discussions have therefore been initiated with a range of governments about the implications of the potential transaction. Under the transaction structure being discussed between the parties, BAE Systems and EADS envisage that certain of their defence activities would be ringfenced with governance arrangements appropriate to their strategic and national security importance, particularly in the USA, given the importance of that market to the enlarged group. In addition, subject to receiving appropriate shareholder approvals, the parties envisage issuing special shares in BAE Systems and EADS to each of the French, German and UK governments to replace the existing UK government share in BAE Systems and the stakeholder concert party arrangements in EADS.

BAE Systems and EADS believe that the potential combination of their two businesses offers the prospect of significant benefits for customers and shareholders of both companies. These benefits include cost savings, such as from procurement and sourcing efficiencies available to the enlarged group, and substantial new business opportunities.

BAE Systems and EADS have historically had different dividend policies with BAE Systems paying a higher proportion of its earnings in dividends. To better align the parties' payout ratios, should the transaction proceed, it has been agreed that EADS would pay £200m to its shareholders prior to completion. BAE Systems and EADS's normal dividend payments in respect of 2012 would be unaffected. In respect of 2013, assuming that the combined earnings are broadly in line with current expectations, it is envisaged that the combined group would declare dividends such that BAE Systems shareholders would receive an equivalent amount to that declared in respect of 2012. This would represent a material increase for EADS shareholders by comparison with current market expectations. The dividend policy for 2014 and beyond would be a matter for the board of the combined group, which is expected to balance the importance of dividends to shareholders with the combined group's future earnings potential, investment requirements and continuing need for a strong balance sheet.

Any agreement on the terms of a potential combination will require approval by the boards of EADS and BAE Systems. Prior to any such agreement, EADS will inform the relevant bodies representing the interests of its employees in accordance with applicable laws and regulations. If, after completion of the processes described above, EADS and BAE Systems reach definitive agreement on the terms of any combination, completion would be subject to, amongst other things, a number of governmental and regulatory approvals, the approval of ordinary shareholders of both BAE Systems and EADS and certain conditions that are customary for a transaction governed by the City Code on Takeovers and Mergers (the Code). There can be no certainty that the discussions will ultimately lead to a transaction.

In accordance with Rule 2.4(c) of the Code, both parties or EADS are/is now required, by no later than 5:00 p.m. London time on 10 October 2012, to either announce a transaction in accordance with Rule 2.7 of the Code or announce that they or EADS no longer intend to pursue a transaction, in which case the announcement will be treated as a statement to which Rule 2.8 of the Code applies. The deadline can be extended with the consent of the Panel in accordance with Rule 2.6(c) of the Code.

BAE Systems confirms its intention to request an extension to the deadline from the Panel if it and EADS are still in discussions at that time.

Although no revision is expected, for the purposes of 2.5 (a) of the Code, EADS reserves the right to amend or adjust the terms of the possible transaction i) in the event of the announcement of a competing transaction or of a possible competing transaction involving BAE Systems or ii) with the recommendation of the board of BAE Systems.

A further announcement will be made as appropriate.