video transcript

With the deadline fast approaching, the race is on to keep the BAE-EADS mega merger from hitting the ground. A stand-off over state shareholdings has put the 45-billion-dollar deal on a knife edge ahead of Wednesday's cut-off. An agreement would see Britain's BAE Systems join forces with the European Airbus parent to become the world's largest aerospace and arms group. But the UK's threatening to block a deal unless French and German stakes are capped. Despite the eleventh hour stalling, Defence analyst David Reeths is optimistic a compromise can be reached. SOUNDBITE (English) IHS JANE'S DIRECTOR OF CONSULTING DAVID REETHS, SAYING: "I don't believe the deal is dead. It's certainly at a very, I would say, an important part of the negotiations. The UK has those red lines and they're based on more than just the UK's interest. They want to protect BAE's ability to operate within the American market which is one of the key parts of the deal." But a fierce attack from BAE's major shareholder could put another spanner in the works. Invesco Perpetual criticised the merger on Monday - it fears the company's key American business will be damaged. BAE has a special security arrangement to allow it do sensitive work there. But with the US defence budget in a tight squeeze, BAE's already beginning to feel the pinch. Sales in the first half of this year were down by 10%. With defence spending shrinking in Western Europe too, aerospace analyst Zafar Khan says its BAE and Britain who need this deal most. SOUNDBITE (English) SOCIETE GENERALE AEROSPACE AND DEFENCE ANALYST ZAFAR KHAN, SAYING: "It makes sense from the BAE stand point because they have big problems coming up in defence where you're going to have major cuts in the western budgets. they need to diversify away from that particular area. For EADS, it's less clear to us because they have a very good outlook on the civil business and we think that by doing this merger at this time they are diluting that strong outlook" Where the combined company will be based is another stumbling block to negotiations. Germany wants the headquarters in Munich rather than EADS's Airbus base in Toulouse. Plans have already been drawn up to give both sides extra time. At this stage, they may well need it. Ivor Bennett, Reuters