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12 Nov 04. The French government plans to merge Airbus parent EADS with Thales, the country’s largest defense company, to create a new European giant to rival Boeing Co., a leading financial daily reported Friday.

Finance Minister Nicolas Sarkozy would not comment on the report in Les Echos of an impending government-backed takeover of Thales SA by European Aeronautic Defence and Space Co., his spokesman said. EADS, which controls Airbus, also refused to confirm or deny the existence of such a plan, describing the report as a “rumor.”

But investors took it seriously, sending Thales shares soaring as much as 7 percent while EADS stock dipped 4.6 percent. By mid-afternoon, EADS shares were down 1.8 percent at 24.45 euros ($31.56) and Thales shares remained up 4.3 percent at 33.00 euros ($42.59).

A tie-up between EADS and Thales would create a new defense and aerospace giant with annual sales of 40 billion euros ($52 billion) — higher than those of U.S. rival Boeing in 2003. Airbus overtook Chicago-based Boeing last year to become the world’s leading supplier of large passenger planes, and the two companies have been exchanging trans-Atlantic barbs over alleged unfair subsidies. Thales provides electronics and weapons systems for planes, ships and ground-based forces. EADS, formed by a 2000 merger between French, Spanish and German companies, spans passenger and business jets, fighters, helicopters, satellites and missiles.

Under the reported plan, Thales shareholders Alcatel SA, the telecommunications equipment maker, and aerospace group Dassault SA would acquire two Thales units.

The paper said the deal would not stand in the way of a tie-up between Thales and the state-owned warship builder DCN, which the government has already said it would endorse.

If both went ahead, it could trigger a long-awaited wave of consolidation in Europe’s fragmented naval shipbuilding sector, with Germany’s ThyssenKrupp AG the next obvious target. Europe currently has more than 20 major shipyards — compared to six in the United States — and about the same number of naval defense technology firms.

Last month, French electronic equipment maker Sagem SA and state-controlled aircraft engine maker Snecma announced plans to merge in a deal valued at 4.5 billion euros ($5.7 billion) that will create another new aerospace, defense and telecommunications group. The combined entity would have annual revenues of about 10 billion euros. EADS owns 80 percent of Airbus, with Britain’s BAE Systems PLC holding the remaining 20 percent. The French state owns 15 percent of EADS and almost one-third of Thales.

Comment: In our BATTLESPACE UPDATE, 29th May 2003 we said, β€˜NEW EADS UNIT OPERTIONAL IN JULY – THALES DEAL BECKONS?’ On May 22nd Philippe Camus, co-chief executive of EADS said in an interview published on Thursday that he believed Thales would play a key role in the future restructuring of the European defence industry. He also told French daily Le Monde that he would not sit by and let his company’s links with the French defence electronics group threatened by other firms. Camus also told the paper he would be “very demanding” on the terms of any space combination with French telecoms equipment group Alcatel, saying he was not interested in creating a 50/50 joint venture.

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