LONDON – U.K. defense contractor BAE Systems PLC and European aerospace giant EADS NV said Wednesday they are in talks about combining their businesses into a global aerospace and defense group.
The companies said that under the proposed merger, BAE Systems shareholders would own 40 percent and EADS shareholders 60 percent of the enlarged group.
In statement to the London Stock Exchange confirming the discussions, BAE and EADS pointed to a "long history of collaboration" on projects such as the Eurofighter Typhoon jets, which are partly assembled in Britain and then built by EADS elsewhere in Europe.
The deal would unite the companies' boards and management but they would continue to be listed separately on stock exchanges, the statement said.
EADS would have to pay 200 million pounds ($322.1 million) to its shareholders prior to the completion of any deal in order to align the companies' different dividend payout policies.
U.K.-based BAE and Leiden, Netherlands-based European Aeronautic Defence & Space Company acknowledged the sensitive nature of its global businesses and said it has has initiated discussions with "a range of governments" about the implications of any possible merger.
The proposed deal would change the European defense market beyond recognition, according to IHS Jane's analyst Guy Anderson, which could pose a tough sell for regulators from the U.S. to Brussels.
"This is potentially bigger than the Euro merger of '99 which created EADS," Anderson said. "The call for consolidation to save the European defence industries has been ringing out for years now, and with this it appears to be happening in a bigger way than ever hoped."
With BAE and EADs already cooperating on Eurofighter and owning two of the three parts of the the MBDA missile making group, a merger would change ownership structures across Europe and regulators will need convincing that it won't crush competition.
"It will probably take a while to unravel all the details and find the actual degree of overlap," Anderson added.
Any agreement on the terms of merger would require approval by the boards of both companies, according to the stock exchange statement.
The companies have until Oct. 10 to announce a deal or that they don't plan to pursue a merger.
Last month, U.K.-based BAE reported a slight dip in first-half profits and cautioned about its U.S. outlook amid uncertained over defense spending ahead of November's presidential election.