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15 Nov 04. The FT reported that backstage moves by Paris to encourage a tie-up between EADS, the aerospace group, and Thales, French defence electronics group, could cause a a rift in Franco-German talks in Berlin on Tuesday.

Nicolas Sarkozy, French economics minister, and Wolfgang Clement, his counterpart, will try to bridge differences over what Chancellor Gerhard Schröder has called Mr Sarkozy’s “nationalistic” industry policy.

Reports of plans by Mr Sarkozy and Thales shareholders to engineer its break-up and takeover by EADS surfaced in Paris last week, sparking fears in Berlin that the balance of power between French and German shareholders in EADS could be upset.

“Such a deal would make no sense at all,” a Berlin official told the FT. “It would be a political transaction.” EADS senior executives said that a deal could be off in the short-term because of German sensitivities and attempts to move into the US market.

The French government and media group Lagardère have 15 per cent each of EADS. Daimler Chrysler represents German interests with 30 per cent. Thales would bring turnover of €11bn ($14.2bn) to EADS, making the French dominant.

The French government with 31 per cent of Thales, has wanted a tie-up for some time in spite of Thales’ objections. However a deal has been given renewed impetus by the fact that Alcatel and Dassault, which together own 14.7 per cent of Thales, have indicated they would be prepared to back a bid by EADS in return for assets thought to represent 15 per cent.

Denis Ranque, Thales’ chief executive and opponent of a break-up, is thought to have known nothing of the talks. People close to EADS and Thales said the plan leaked because of Mr Sarkozy’s eagerness to see a deal wrapped up before he relinquishes his portfolio this month. People close to Mr Ranque said yesterday that he “was not opposed to any kind of evolution for Thales so long as it made sense”.

The French government is aware of Berlin’s misgivings. As a quid pro quo, reports have suggested, Paris could offer to put a future “naval EADS” entirely under German management. Such a company would include Thales’s naval electronics business, the soon-to-be privatised Direction des Constructions Navales (DCN), and ThyssenKrupp Marine Systems. Berlin, however, sees DCN, the French naval shipbuilder, as needing extensive restructuring. Berlin derided Mr Sarkozy’s suggestion, last month, that the future naval giant could take over the loss-making shipyards of Alstom. A spokesman for Mr Clement said EADS and Thales would be on the insisted the topic was not.

Later, it was announced that no merger proposal has been submitted to the boards of French defense company Thales SA and European aerospace consortium EADS despite reports that the French government is interested in a linkup, German Economics Minister Wolfgang Clement said Tuesday.

“There isn’t yet any proposal on the table,” Clement said after talks in Berlin with French counterpart Nicolas Sarkozy, the first meeting of a working group set up by the two. Sarkozy confirmed that neither of the two companies had presented a concrete proposal. Thales also confirmed that, “Contrary to certain press reports, no meeting of the Thales Board of Directors has been convened to examine any form of linkage with EADS.”

Comment: The announcement of this proposed merger should come as little suprsie to seasoned BATTLESPACE readers.

In a well-publicized announcement during the 2001 Paris Air Show, EADS defence supremo Dr Stefan Zoller announced that he was going to form a €3bn electronics segment within three years. This came at a time when EADS had recognised that to become a major force in military aircraft and C4I systems that it must have a strong electronics segment to compete with the likes of BAE and the US giants.

However, he had sev

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