BAE and EADS face biggest challenge over plans for £30bn merger Britain may not stand in the way of a deal, but a huge political battle will have to be fought on the Continent. The French and German states each control more than 20pc of EADS, while Spain controls 5pc, and there are early signs that they will not be willing to relinquish control entirely. That is where the biggest question mark appears to be at the moment, and significant stumbling blocks remain. Tom Enders, chief executive of EADS, longs for the politics to be taken out of the company, and is hopeful that this deal will provide the opportunity. Political infighting between Paris and Berlin is thought to have blighted the company since its inception in 2000, and it has been blocked from membership of the defence trade body in the US because of the European government representatives on its board. It is understood that both EADS and BAE would only be prepared to accept a state shareholding in a new, combined entity if they are subjected to normal shareholding rights and existing state vote-blocking rights are dismantled. In other words, the French and German states will have no representation on the board, no say on who runs the company and no say on decisions. Otherwise a deal will not go ahead. France has indicated that it will want to take forward its stake, albeit on a diluted basis of about 9pc. What else it may want is the subject of heated debate. Paul Quiles, the former French defence minister and a leading member of the ruling Socialist party's left wing, told Reuters the possibility of France giving up its stake in EADS would be hugely controversial. If the creation of this EADS-BAE holding raised the question of the state's exit, there would be a battle in the heart of the Socialist party. That is for sure," he said. Paris has always jealously guarded its stake in EADS that it controls directly and indirectly through Lagardere, the French media group. Arnaud Lagardere, chief executive of Lagardere and EADS" chairman, has said he wants to sell his 7.5pc stake after the new A350 airplane is ready. But reports suggested Lagardere, whose biggest shareholder is Qatar Holding with 12pc, would not sell out on the cheap to make a merger more likely. The French government has so far stayed quiet on the deal, insisting it would give its verdict "at the appropriate time." Insiders say that within the Elysee there are concerns about how the proposed "golden share" in a combined EADS-BAE would operate, and the potential effect of the deal on the country's defence industry. Under the former president, Nicolas Sarkozy, the deal would have been impossible for Enders to envisage. Sarkozy enjoyed a close relationship with Dassault, EADS" biggest home rival. The election of François Hollande has therefore improved the chances of a deal going through, but there are still plenty of hurdles. "It is quite right and proper that each nation has concerns," a source close to the deal said. We wouldn't have got this far without tacit endorsement from governments. Aside from the politics, there is also the matter of the institutional shareholders. Enders and Ian King, his opposite number at BAE, have promised shareholders they will end the guaranteed influence of the French and German governments as part of the structuring of their planned merger. They know they have some convincing to do, as the present EADS structure is frowned on by BAE investors. "[It] is not how you run a commercial enterprise," said one top-20 BAE investor. Institutional holders are always going to feel uncomfortable alongside government influence. It is not in the interests of UK investors to own such a business. Berlin effectively wields ­control over EADS through the stake held by German car company Daimler, which the latter has been trying to sell down over the past year. BAE's leading shareholders, dominated by institutional investors such as Axa, Legal & General, Scottish Widows, M&G, Henderson, Aviva, Jupiter and F&C, have little patience for poor corporate governance in companies they invest in. Invesco is by far the biggest owner of BAE, with a 13.2pc stake. Neil Woodford, the investment company's fund manager, is understood to have had a turbulent relationship with BAE's board. Many suggest that without Woodford's buy-in the £30bn deal has little chance of success. Sources close to the talks said that the leak last week took both companies by surprise. One investor described BAE's precis of negotiations as "half-baked" and in need of much "more detailed structure." It has been suggested that French officials leaked the proposed tie-up to stir up opposition between Europe's biggest aerospace and defence companies. "Normalising EADS" government-dominated ownership is the driving force of the deal," said a senior source. "It is not just that BAE is demanding this to appease shareholders, Enders" own strategy has been to shift this power imbalance out of his company." An investor in the French aviation company said: "EADS is definitely frustrated by government interference which in the past has meant it has lost business." Under the merger structure the French and German holding would drop to just 9pc each. Barry Norris, founding partner of Argonaut Capital Partners and EADS investor since 2009, explained why shareholders might be "understandably angry" and argued that "EADS needs BAE like a hole in the head." "Any merger is likely to be fraught with political sensitivities and distract EADS management from executing on the new Airbus projects," he said. EADS also has a significant cash balance of €11bn [£9bn] on its balance sheet which will now be shared with BAE. So what is the rationale for BAE and EADS? When King and Enders began talks three months ago, it was the continuation of a discussion that spans decades. For BAE, a merger would give it a huge presence in the commercial aviation market through Airbus, at a time when defence budgets in the West are shrinking. It would also gain access to the cash pile driven by Airbus sales. Last year, Airbus delivered a record 534 aircraft and EADS has an order backlog of more than €500bn. For EADS, the deal would be an entree to the US market on a scale it craves but has never pulled off. The US government is one of BAE's biggest clients, and despite the uncertainties posed by the forthcoming presidential elections and beyond, it is vital to BAE's future, with or without EADS. Both companies stress the few overlaps between them, making this a unique opportunity, they argue, to create a European defence, aerospace and security group to rival America's Boeing. Where there are overlaps, the two companies say they already have major links through the MBDA missiles business and projects including the Eurofighter Typhoon jet. Indeed, it was the failure of the Typhoon consortium to win a multi-billion pound contract to sell the fighter jet to India that is thought to have triggered the merger talks. There is also the awkward question of BAE's future should the deal fail. Some believe it would be vulnerable to being bought by Boeing or broken up, with its US division and cyber business being the first on the block. But Enders and King believe the changing market conditions and the political backdrop in France make this the best opportunity to do a deal. The motto among submariners on Ambush is "hide and seek," but now the BAE-EADS talks are in the open the real political game begins, no matter the assurances given behind closed doors.