* EADS, BAE call off talks on $45 billion mega-deal
* Partners blame Germany for blocking defence giant
* Berlin came to see deal as too complex, risky
* Fears of domestic backlash also played role
By Noah Barkin and Andreas Rinke
BERLIN, Oct 10 Concerns about the fate of German
production sites, the reaction of investors and the symbolism of
creating a giant military firm in a country with deep pacifist
strains turned Angela Merkel against the European defence merger
that collapsed on Wednesday.
EADS, the Franco-German parent of jetmaker Airbus,
and British defence group BAE Systems announced after
weeks of intense talks they were abandoning plans for a $45
billion deal that would have created an aerospace and defence
giant bigger than Boeing.
Bankers involved in the deal, officials in Paris and at EADS
all blamed Germany for the failure, saying Berlin had been
offered crucial concessions in the final days of the
negotiations, only to quash it nonetheless.
The German government has rejected that narrative. Officials
in Berlin, many speaking on condition of anonymity, paint a more
nuanced picture, without hiding their ultimate verdict - that
the deal made little sense.
The officials said initial enthusiasm for the deal and EADS
chief Tom Enders' plan to give the German, French and British
governments golden shares in the combined group gave way to
doubts when the French, who own 15 percent of EADS, insisted on
retaining a substantial stake.
Fearful that German know-how, jobs and plants would be
compromised, Berlin decided it needed to keep parity with Paris
in order to defend its interests.
But behind the scenes German officials - especially
Chancellor Merkel's Free Democrat (FDP) coalition partners -
remained leery about buying a substantial stake in the firm, two
senior German sources said.
They were convinced that the new group would be penalised in
the U.S. market - where BAE enjoys privileged status - if the
French and German governments took big shares, and that sales of
civil jets to countries like China and Indonesia could suffer as
Officials in Berlin also worried about the sharp fall in
EADS shares that occurred when news of the secret negotiations
leaked in mid-September, and the reservations of the big private
stakeholders, including German carmaker Daimler and
French media group Lagardere.
"We started asking ourselves, does this deal really make
sense," said one senior German official. "The market went down,
investors were against it, the synergies were unclear, as was
U.S. market access with the big state shareholdings."
Compounding the doubts was growing unease with the idea of
turning EADS, which is seen by most Germans as a civil aerospace
firm despite its military interests, into a huge defence concern
by bringing in BAE.
Defence exports are already a controversial issue in
Germany, a country where many people remain uneasy about
military trade nearly 70 years after World War Two ended.
The risk-averse Merkel, who faces an election one year from
now, and her entourage had concerns about how the deal would go
down domestically, sources acknowledged.
"This would have created the biggest defence company in the
world," said a second source close to the chancellor. "But
defence is an especially sensitive subject in Germany."
The complexity of having three different governments
involved also gave the Germans pause, but ultimately they say,
the different parties were unable to resolve the shareholding
issue to everyone's satisfaction.
Paris wanted to retain the option of going up to 13.5
percent by buying the stake held by Lagardere at a later date.
German officials insisted they be able to follow suit.
But the British wanted a cap of 10 percent each, concerned
that the Germans and French could approach a blocking minority
if they went above that level.
As a Wednesday deadline approached for deciding whether to
extend the talks or end them, the Germans determined the risks
were too high, and that further negotiations would only prolong
When EADS and BAE came out and announced the deal was off,
instead of expressing regret, Berlin's coordinator for aerospace
Peter Hintze made clear what the government had come to believe
in the final weeks of talks that Germany's interests were "best
guaranteed" by sticking with the status quo.
"We had reservations about the deal but so did the others,"
the first official said. "Everyone had their red lines, everyone
wanted the headquarters. When the question came of whether to
extend the talks or not, we thought the negatives outweighed the