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BAE holds talks with Saudi Arabia over planned EADS ‘merger’

Saudi Arabia’s approval for defence giant is critical because of its role as huge customer

By Richard Wachman | 8 October 2012

“They do not want BAE subsumed by a US major because it would decrease competition and push up prices” – Dr John Louth, defence specialist, RUSI

BAE Systems has held secret talks with the Saudi government to win approval for its planned merger with European defence giant EADS.

Saudi Arabia is one of BAE’s biggest customers, and executives at the British defence company are eager to keep it on side.

A source with knowledge of Britain’s ‘special relationship’ with the kingdom said: “The Saudis are very conservative, and they hate surprises. They like continuity.”

BAE is understood to have begun consultations with the Saudi government long before last month’s confirmation of merger talks with EADS, which also makes Airbus passenger planes.

Although described as a merger, the plan is for EADS to own 60 per cent, and BAE 40 per cent, of the new group. Under the code of the UK’s Takeover Panel, the companies must make an announcement on progress of their talks by Wednesday, but may request an extension.

BAE insiders confirmed that the company has been talking with its ‘stakeholders’, and that dialogue was continuing. The stakeholders go beyond the governments of the UK, the US and elsewhere in Europe that have featured so prominently in Press coverage of the tie-up to date.

Dr John Louth, a defence specialist at RUSI, the Royal United Services Institute, the security think-tank, said: “As far as the Saudis go, the consultative process has been going on for some time, my contacts say for quite a few months.

“The attitude of the Saudis has been quite positive. They realise that, with shrinking defence budgets in Britain, Europe and the US, BAE faces a massive strategic challenge.” Louth said that the Saudis would prefer BAE to link up with EADS, allowing the British company to retain some autonomy, rather than be subject to an outright takeover by a US rival, such as Lockheed Martin.

“They do not want BAE subsumed by a US major because it would decrease competition and push up prices.”

If the EADS-BAE deal goes ahead, the ongoing British arms relationship with the Saudis would be ring-fenced, say analysts.

In the past, the UK government has acted as a flag bearer for British defence sales, securing lucrative contracts in the Middle East.

These include the huge ‘Al Yamamah’ agreement, under which BAE has sold military jets – including Tornados and Hawks – to the Saudis.

BAE insiders say that they have met representatives of the Saudi government to tell them about the deal with EADS in an attempt to allay any concerns.

Analysts are emphatic that the deal would not happen in the face of Saudi resistance.

Howard Wheeldon, policy director at ADS, the trade body for the UK defence industry, said that BAE would not need formal permission for the merger from the Saudi ruling elite, “but it would be hoping for its blessing.”

“Otherwise, there would be the danger of a big customer taking its business elsewhere in the future.”

Analysts added that a deal would provide opportunities for EADS to use BAE’s historical links in the region to boost sales.

BAE has already sold Eurofighter Typhoons to the Saudis. The fighter jet is an Anglo-European project in which BAE and EADS are two of the three key partners. But EADS is also keen to sell its civilian and military Eurocopters to the Saudis and Gulf states such as Qatar.

The relationship between BAE and Saudi Arabia has been rocked in the past by allegations of bribery. But an investigation into alleged bribes paid by BAE in connection with Al Yamamah in 2006 was dropped by the Serious Fraud Office (SFO) following pressure exerted by Tony Blair’s Labour government and the Saudi government.

Richard Alderman, SFO director for four years after that episode, said that the decision tarnished the UK’s reputation.

In August, the SFO launched a full criminal investigation into a British subsidiary of EADS, GPT Special Project Management, over bribery allegations surrounding a huge contract to overhaul military communications in Saudi Arabia.

The announcement followed a series of disclosures by Exaro about secret payments to offshore companies, and just two days after revelations about the alleged gifting of expensive cars to two Saudi military chiefs.

Update 10 October 2012: BAE and EADS today called off the ‘merger’. BAE said that the interests of the governments of the UK, France and Germany could not be reconciled.

It said in a statement: “BAE Systems and EADS have therefore decided it is in the best interests of their companies and shareholders to terminate the discussions.”

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