Shares in defence group BAE Systems surged before the close of trade on Wednesday after it confirmed rumours that it is in talks with European aerospace giant EADS regarding a 'possible combination'.

"BAE Systems and EADS have a long history of collaboration and are currently partners in a number of important projects, including the Eurofighter and MBDA joint ventures," BAE said in a statement.

"The potential combination would create a world class international aerospace, defence and security group with substantial centres of manufacturing and technology excellence in France, Germany, Spain, the UK and the USA."

As well as offering the prospect of "significant benefits" for customers and shareholders of both companies, BAE believes that the merger could also save on costs and present "substantial new business opportunities".

BAE's shares were up 7.39% at 353p.

The tie-up would see BAE's shareholders hold a 40% interest in the enlarged group, while EADS's shareholders would own 60%. BAE said that there would be a "unified board and management structure". As both companies have historically had different dividend policies - BAE has paid a higher proportion of its earnings in dividends - EADS would pay £200m to its shareholders prior to completion "to better align the parties' payout ratios".

The potential merger would be implemented through the creation of a dual-listed company structure. This means that both companies would operate as one group but would be separately listed on their existing respective exchanges in London (BAE) and Paris (EADS).

'...highly secure and sensitive...'


The companies have been discussing the potential implications of the proposed transaction with a range of governments given that they operate "highly secure and sensitive defence businesses" around the globe.

They said that they would have to ringfence some of their defence activities "with governance arrangements appropriate to their strategic and national security importance, particularly in the USA, given the importance of that market to the enlarged group."

The statement said: "Subject to receiving appropriate shareholder approvals, the parties envisage issuing special shares in BAE Systems and EADS to each of the French, German and UK governments to replace the existing UK government share in BAE Systems and the stakeholder concert party arrangements in EADS.

Related share prices
BAE Systems (BA.) share price