BAE flags US uncertainty after EADS collapse

Britain's BAE Systems on Thursday warned of uncertainty over US defence spending but maintained its annual profits outlook, a day after a mega-merger with European aerospace giant EADS failed. BAE and EADS abandoned their blockbuster tie-up on Wednesday when tense negotiations collapsed under the weight of political wrangling. The London-listed group, which earns almost half its revenues in the United States, continues to face the prospect of falling defence spending by nations around the world. "Uncertainty as to how US federal deficit reduction will be implemented ... continues to cloud the outlook for the US government defence budget," said BAE in a trading update on Thursday. "Some limited trading disruption is likely in the last quarter of the 2012 calendar year." However, the group expressed confidence for the future, saying that the overall annual profits outlook remained unchanged. "As indicated previously, modest growth in underlying earnings per share is anticipated for 2012." The group added that trading during its third quarter "has been consistent with management expectations at the time of the half-year results announcement" in August. BAE has been forced to soldier on under the guidance of embattled chief executive Ian King, after ending tie-up talks with EADS owing to a lack of accord with "various" government stakeholders. The proposed merger to create the biggest aerospace and defence group was brought down by unexpectedly strong opposition from Germany. Observers said Germany torpedoed the deal because the power behind the civilian arm of the new group would shift completely to Toulouse in southern France. Berlin was also said to reject that the group's military operations would be run from London, where BAE is based, leaving Germany empty-handed. BAE Systems meanwhile sought to defend the collapsed merger in an open letter that was published in British newspapers on Thursday. "We felt as a company and a board that bringing BAE Systems and EADS together would create a business that was even better than the sum of its parts," BAE chairman Dick Olver and chief executive King wrote in the letter. "We envisaged a business able to access new markets, ride the cycles of defence spending and civil aircraft demand more smoothly, drive procurement and supply chain efficiencies and use its bigger balance sheet to seek new opportunities. "We also foresaw a business able to compete on equal terms with the biggest US prime contractors and act as a strong stable partner for the governments of Europe and the US." BAE added however that it remained "strong and financially robust" despite the failed deal. "We continue to see opportunities across our platforms and services offerings and in the various international markets in which we operate," it said in the trading update. "We remain committed to delivering total shareholder value and look to the future with confidence." BAE and EADS were regarded by analysts as a good fit because BAE is an expert in defence -- making military transporters, Challenger tanks, Tornado jet fighters and aircraft carriers -- whereas EADS's work is mostly in the commercial sector with its flagship Airbus passenger jet. The pair had hoped to create a global champion in the fields of civil and defence aviation, that would compete more effectively with fierce US rival Boeing.