EADS and BAE Systems confirm they are in discussions over business combination

EADS and BAE Systems confirmed (12-Sep-2012) they are in discussions regarding a possible combination of their businesses. This would be implemented through the creation of a dual listed company structure, under which both companies would operate as one group by means of equalisation and other agreements, but would be separately listed on their existing exchanges. Discussions between the parties envisage BAE Systems shareholders would own 40% and EADS shareholders 60% of the enlarged group. There would be a unified board and management structure with identical boards and executive committees at each company. Discussions have been initiated with a range of governments about the implications of the potential transaction.

• Defence activities: Under the transaction structure being discussed, BAE Systems and EADS envisage certain of their defence activities would be ringfenced, particularly in the US;
• Government ownership: 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;
• Dividends: 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 it has been agreed that EADS would pay GBP200 million to its shareholders prior to completion. BAE Systems and EADS' normal dividend payments in respect of 2012 would be unaffected. For 2013, assuming combined earnings are broadly in line with current expectations, 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;
• Approvals: Any agreement on 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 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. There can be no certainty the discussions will ultimately lead to a transaction. [more - original PR]