* Sources say UK, France propose broad state voting cap
* Idea would allow states to raise stakes if ceiling intact
* Germany said to maintain demand for parity with France
* EADS, BAE boards meet to decide whether to seek more time
* UK deadline for deal expires on Wednesday
By Tim Hepher and Chris Vellacott
PARIS/LONDON, Oct 9 An Anglo-French breakthrough
over state shares in a $45 billion arms merger between EADS and
BAE Systems made an extension of a negotiating deadline more
likely, but put the two nations on a potential collision course
With a 1600 GMT deadline on Wednesday fast approaching,
both companies' boards met to decide whether to keep their
merger hopes alive by seeking a roughly two-week extension to
complete their dramatic obstacle course towards a deal.
British Defence Minister Philip Hammond said the groups now
had a clear idea of government "red lines" for the complex and
sensitive deal. He expected them to say whether they would seek
an extension before the London stock market opens on Wednesday.
The decision is a critical one for Tom Enders, the head of
EADS and BAE counterpart Ian King, who have
staked their companies' reputations on realising a decade-old
plan for a global aerospace and defence giant based in Europe.
"Ian King and Tom Enders will discuss the situation later
today and then decide, jointly with the respective company
boards, the way forward," EADS said in an emailed statement.
In an important change of tone after days of tense talks,
sources familiar with the matter said France and Britain had
significantly narrowed differences over the wording of
guarantees on state shareholdings in the merger to create the
world's biggest arms and aerospace group.
French Defence Minister Jean-Yves le Drian said on the
sidelines of a meeting of NATO defence ministers in Brussels
that negotiations on the merger had moved forward.
"We had made a lot of progress, I think, but have we
progressed enough? That is up to those who initiated the project
to say," the minister said.
Yet doubts emerged almost immediately over whether Germany -
the other half of the Airbus parent group forged together with
France in 2000 - would back the proposal.
The companies have insisted they will only request an
extension to the Oct. 10 deadline set by UK regulators if there
is meaningful progress at government level.
The idea hammered out in three days of talks is to allow
France to increase its stake but only if an overall ceiling on
state shareholdings in the new aerospace group, which will
employ 220,000 people, was respected.
Sources said this should not be much more than 18 percent in
order to win backing from BAE, which wants to protect its large
U.S. defence business from any disruptive new regulation
stemming from U.S. concerns about foreign government control.
But this would mark a departure from a system of
power-sharing between France and Germany or their industrial
allies in EADS and risks rekindling years of cross-border
"For this to work, it would mean breaking the link between
the potential future size of the French shareholding and the
German one," a diplomatic source following the talks said.
France has so far insisted on the right to acquire more than
10 percent of the new group, compared with the 9 percent it
would automatically end up with under proposed merger terms.
Germany wants parity with France, and a senior negotiating
source said the German position was unchanged and that Berlin
remained far from impressed with progress.
"The situation looks dark for the merger since there is
still no consensus between the governments," the source said,
adding the companies could decide to call the merger off.
EADS denied a German news agency report that talks had
collapsed and confirmed progress in the UK-French negotiations.
"We are surprised to see the reports from Berlin. Only this
morning, we have received the information that France and the UK
have made significant progress on the issue that was blocking
the negotiations for the last few days," an EADS spokesman said.
"The two companies will discuss the situation and possible
steps forward this afternoon."
The approaches of the French, British and German governments
at the start of the talks were different, the French minister
said. "They have moved noticeably closer together but have they
moved closed enough for the companies to think it is worth
(asking for) an extension? That is up to them to say," he said.
EADS has put its unions on stand-by for briefings on a
possible deal in either one week or two weeks, union officials
said, suggesting the companies would seek a far shorter
extension than the maximum allowed 28 days. A scheduled European
works council went ahead on Tuesday with no managers present.
The mention of "significant progress", the most upbeat
comments by EADS since merger talks emerged last month, appeared
to meet the criteria for an extension in the UK deadline.
A French government source said the nation had not changed
its official opposition to a 10 percent cap on its future
shareholding in the group that would team Airbus airliners with
BAE's weapons factories.
Underscoring doubts among investors, shares in EADS rose
sharply on the reported failure, then fell back to mark time
awaiting the decision from top management assembled in Toulouse.
The companies say they cannot spell out the full benefits of
the merger before completing negotiations over the shape of the
company's capital and possible guarantees on investment.
"The first thing they will have to do is get an extension
and then the communication from the company has to improve,"
said one of the top BAE shareholders, asking not to be named.
"They have to get on the road and convince investors why
this is a good thing. I don't think just placating the
governments is going to work any more now."
Britain and France have the power to veto the deal, which
must also be approved by the United States and overcome
political objections in Germany. France owns 15 percent of EADS
which would be diluted to 9 percent of the new group. Germany is
not a direct shareholder.
Core EADS shareholders Lagardere, the French media
firm, and German car firm Daimler also have the right
to veto a deal. Both have expressed unease about the terms but
are not participating in board discussions to prevent a conflict
of interest, according to a person familiar with the talks.