Germany lists EADS/BAE worries while UK starts inquiry

Underlining the complex domestic and international politics surrounding the proposed deal, British Prime Minister David Cameron has also contacted the leaders of France and Germany, seeking to safeguard UK interests should it go ahead.

The $45 billion merger would be the biggest shake up of Europe's defense and aerospace industry in a decade and touches on the sensitive issues of safeguarding jobs and military relations with Washington.

Berlin's worries, revealed in an economy ministry document obtained by Reuters on Monday, include doubts about whether the combined group would be safe from takeovers and could guarantee jobs when even Germany is being hit by the euro zone crisis.

The document marks the latest sign that the planned merger between EADS, which is strong in civilian aviation, and the British defense group could run into trouble due to disagreement between Paris and Berlin over the degree of government say in the future company.

EADS, which is controlled by a group of French and German public and industrial interests, has warned it would walk away from the deal with BAE that was publicly proposed earlier this month if the new group were to suffer excessive state meddling.

"A key point of the discussions with EADS is the question of take-over protection," said the document, which is addressed to a German parliamentary committee investigating the plan.

EADS and BAE have said they will offer the governments of France, Germany and Britain a "golden share" in the new company, which sources say is aimed at preventing a hostile takeover.

"France and Germany agree the 'special share' offered by the company does not offer a complete guarantee, as this can possibly be challenged by European law. Possibilities for achieving an effective take-over protection are under discussion but will be difficult to defend legally," the document said.

Golden share arrangements can and have been challenged within the European Union. In 2003 the European Court of Justice ordered the British government to give up its golden share in airport operator BAA, for example.

Three years later Spanish infrastructure firm Ferrovial (FER.MC) bought BAA, which owns London Heathrow and several other British airports, for 10.3 billion pounds.

EADS and BAE together employ tens of thousands of workers across Britain and continental Europe. The plan dominated a meeting of German Chancellor Angela Merkel and French President Francois Hollande on Saturday, but the pair failed to reach any common decisions. They are, however, striving for a joint position, the document said.

It said guarantees provided on future location of factories were not reliable, underscoring fears about possible job losses if the plan goes ahead. EADS has about 50,000 employees in Germany across 29 sites.

RATIO UNHAPPINESS

German carmaker Daimler (DAIGn.DE), French media firm Lagardere (LAGA.PA) and the French state all hold substantial direct stakes in EADS.

The document showed Berlin is unhappy with plans to value EADS at 60 percent of the combined company. Sources have also told Reuters that Daimler feels the deal undervalues EADS.

The paper said the 60-40 ratio "does not correctly reflect the actual value which is closer to 70 to 30".

Based on recent share prices, the ratio would have been nearer 50-50 in 2010 but in the last few months, BAE's share of the overall market capitalization has fallen below the 40 percent mark.

Berlin has no direct stake in EADS, but had planned to acquire part of Daimler's holding through state development bank KfW. The acquisition plan has been "significantly complicated and delayed" by the proposed merger, the government paper noted.

EADS CEO Tom Enders will appear before German parliament on Wednesday morning to put forward the case for a combination with BAE Systems and answer politicians' questions, German paper Die Welt said in an advance copy of a story to be published on Tuesday.

EADS and BAE have until October 10 under UK takeover rules to set out detailed plans for the merger, although there is speculation they may seek an extension.

In London, a spokesman for Cameron said the British leader had spoken to Merkel on Friday and Hollande on Monday about the issue. BAE employs 35,000 people in Britain, while EADS has about 15,000 employees in the country.

"Given the nature of the companies' activities the government will clearly have some involvement and we need to ensure that the UK's public interest is properly protected," the spokesman said. "We are talking to the companies to ensure that that is the case."

BAE, which also has 40,000 staff in the United States, has a Special Security Arrangement with the Pentagon that allows it to work as a subcontractor on classified contracts.

BRITISH INQUIRY

Britain's cross-party parliamentary defense committee launched an inquiry on Monday into the possible merger.

The influential committee said it would take evidence in October and November to establish the impact any merger would have on the protection of British sovereign capabilities, defense exports, Britain's relationship with the United States and European allies, and jobs and trade.

The two companies' manufacturing sites in Britain include BAE's shipyards in Scotland and EADS' Airbus wing factory in north Wales.

"BAE are leading talks with the British government but EADS are very much involved - they (the government) are seeking assurances on jobs from the Airbus side as much as the BAE side," said a source close to BAE.

Potentially adding to the complications, the EU and Washington have traded allegations for years in a dispute over state aid to EADS and U.S. group Boeing (BA.N).

In Geneva, the United States said it had complied with a ruling ordering it to withdraw unfair subsidies to Boeing as tit-for-tat exchanges flared up in the world's largest trade dispute.

The World Trade Organization (WTO) found in March that the U.S. planemaker had received billions of dollars in unfair aid, following an earlier ruling against European support to Airbus.

Washington has targeted government loans to Airbus, which it says helped the European planemaker compete unfairly to replace Boeing as the world's largest commercial jetmaker. The EU says Boeing is unfairly assisted by government research deals and other federal and local measures.

(Additional reporting by Estelle Shirbon, Tom Miles and Victoria Bryan; writing by Gareth Jones, Alexandra Hudson and David Stamp; editing by Philippa Fletcher)