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04 Jul 03. The FT reported that BAE Systems, the UK defence group, could hold on to its 20 per cent stake in Airbus, the European aircraft maker, if it were to merge with any US aerospace and defence group other than Boeing, Mike Turner, BAE chief executive, said on Friday.

Airbus is owned 80 per cent by EADSand 20 per cent by BAE, which has made increasingly clear in recent weeks its long-term ambition to merge with a large US defence group to gain a greater presence in the world’s biggest defence market. A merger with Boeing rivals, such as Lockheed Martin or Northrop Grumman, would mean that the combined group could hold on to the Airbus stake and give the US aerospace industry a direct interest in one of the flagships of European industry.

EADS executives have suggested that the Franco-German group would be keen to acquire the BAE minority stake in Airbus, which accounts for the lion’s
share of Eads profits, if there were to be any change of ownership at BAE. They also said that it could benefit from a specific call option agreed three years ago with BAE, when the deal was made to transform the former Airbus consortium into a single integrated company.

The EADS information prospectus details that it “benefits from a call option at market value on the Airbus shares [held by BAE] in case of a change of control of BAE Systems in certain circumstances”. Mr Turner has suggested that Airbus could be worth $30bn by 2006 with higher production and the launch of the A380 superjumbo. The call option for Eads on BAE’s Airbus stake, he said, covered only two specific circumstances, namely a merger of BAE with Boeing – Airbus’s arch rival in civil aircraft – or a nationalisation of BAE by the UK government.

EADS said that the group would certainly exercise its call option to acquire the BAE Airbus stake in the event of a BAE merger with Boeing. It said that the call option had been “targeted mainly at preventing Boeing gaining access to key Airbus technologies”, especially in wing design and manufacturing, which is based in the UK.

Mr Turner said that, under the agreement, the “market value” for Airbus would be determined by two investment banks to be appointed each by BAE and EADS. Arbitration would be provided by a third investment bank if
there was no agreed value.

The BAE stake in Airbus could prove an attractive asset for any US aerospace group considering a potential merger with BAE as Airbus has been developed to the point where it is poised to take over leadership of the world commercial aircraft industry for the first time from Boeing. It has sold more aircraft than Boeing in three of the past four years and this year is expected to deliver more than its US rival for the first time in its more than 30-year history.

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