BAE and EADS merger hopes rest on government talks

The UK, French and German governments are holding talks that will decide whether the merger between defence companies BAE and EADS goes ahead.

France and Germany need to agree to conditions laid down by the UK and the two firms.

At the moment, a deal seems unlikely, according to the BBC's business editor Robert Peston.

The two companies must decide whether to ask for an extension to merger talks by 16.00 GMT on Wednesday.

UK Defence Secretary Philip Hammond is meeting in Brussels with his French and German counterparts. The merger needs the approval of the UK, French and German governments.

Our correspondent says the German and French governments must agree to limit their stake in any merged company.

"Right now, getting guarantees from France and Germany on all this is proving impossible, but that could change in the course of the night, I am told," he said.

"My sense from those close to the negotiations is that the collapse of the deal is the most likely outcome."

Earlier, EADS denied talks were set to collapse, with France and the UK making "significant progress" over key issues.

"We are surprised to see the reports from Berlin," said an EADS spokesman, following claims by the German news agency DPA that the talks had failed.

"The two companies will discuss the situation and possible steps forward this afternoon," he added.

On Monday, Mr Hammond said he did not think there was any chance the deal would be settled by the Wednesday deadline.

The British and Americans are both insisting that the French and German governments reduce their stakes in EADS.

At a fringe meeting at the Conservative Party conference in Birmingham on Monday night, a senior BAE Systems executive, Nigel Whitehead, made it clear he shared that goal and understood the need to ensure Britain's national security interests were protected.

Meanwhile, BAE's largest shareholder, fund manager Invesco Perpetual, said on Monday that it had "significant reservations" about the proposed merger, and "does not understand the strategic logic" of the deal.

Invesco, which owns 13.3% of BAE, does not appear to be alone. More than 30% of the UK firm's shareholders have expressed qualms, the Financial Times reported on Tuesday.

Ministers believe there are potential benefits to the merger which could open up new defence markets.

But unless they are satisfied that national security and the relationship with the US are protected, they could still block the deal.

The two companies announced they were in discussions over a possible merger on 12 September.

But since then both BAE and EADS, which is largely controlled by the French and German governments, have denied reports that the talks are in trouble.

On Friday evening, 45 Conservative MPs wrote to the prime minister voicing concerns over the planned deal, saying it would hand the bulk of Britain's defence industry to a company which would not safeguard UK interests.

Earlier, Chancellor George Osborne said the proposed $45bn (£28bn) merger must ensure British security and jobs are preserved.

EADS boss Tom Enders has previously urged politicians not to interfere in the proposed deal.