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Merger talks drive shares down: EADS, BAE Systems

Shares in British-based BAE were down as much as 9 per cent in early trading in London, after gaining 10.6 per cent on Wednesday after the news leaked. Meanwhile EADS shares were down 5.6 per cent at C26.44 in morning trading, leaving the stock back at the level of Tuesday's close and more than 12 per cent lower than last Friday.

If it goes ahead, the deal would create a global aerospace and defence giant with combined sales of more than C70 billion ($90.3 billion) and more than 220,000 employees.

The new company would create a European rival to U.S. defence giant Boeing. Boeing's defence and space business had revenue last year of almost $32 billion, from selling Chinook helicopters and F-18 fighter jets to the U.S. and, increasingly, other countries.

Defence revenue at EADS was a little more than half as much, but by adding BAE, the combined company would have a defence business significantly bigger than Boeing's.

Oliver Wynne-James, an analyst at Panmure Gordon & Co. said the proposed deal "paves the way for value creation across unloved, deep value stocks.''

However the merged organization will have a complex ownership structure split among several countries including the U.K., France, Germany and the Netherlands, and all would have a say in how and whether the merger goes ahead.

"With the prospect of a protracted and bumpy ride to completion, we advise shareholders to cash-in,'' said Andrew Gollan, analyst at Investec Securities in London.

"Approvals will be required from multiple global governments. Perhaps of more significance, agreement by U.K., French, German and Spanish governments on ownership structures, and protection of national interests (e.g. nuclear deterrent), will prove politically highly sensitive issues,'' Gollan said in a research note.

EADS is incorporated in the Netherlands with dual headquarters in Munich and Paris as well as the Airbus headquarters in Toulouse, France.

"There's always political machinations between the French and the Germans,'' said Cai von Rumohr, an aerospace analyst at Cowen & Co. in New York. "Now if you put the British in the mix, I think that's going to get further complicated.''

The British government said it was aware of the proposed deal and was working with both companies to protect British interests.

Germany's Daimler holds a 22.5 per cent stake in EADS, the French government owns 15 per cent and French media company Lagardere has 7.5 per cent.

Lagardere said in a statement on website Thursday that it would "ensure that all consequences associated with the proposed EADS NV – BAE Systems PLC merger are taken into consideration in determining the terms and conditions of the proposed transaction before it consents to the deal.''