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UPDATE 1-EADS options slipping away on tanker bid

Published 04/16/2010, 01:11 PM
Updated 04/16/2010, 01:28 PM

* EADS looking for partner after second bid setback

* EADS still in talks with possible partners - sources

* Shares fall 1 percent

(Adds extra quotes, background)

By Tim Hepher and Jim Wolf

PARIS/WASHINGTON, April 16 (Reuters) - Twice-jilted EADS faced a dwindling set of options on Friday as it scrambled, without a much-needed partner, to preserve its hopes of bidding for a refuelling plane deal in the U.S.

EADS, the parent of European planemaker Airbus, has been left solo for the second time in as many months as it ponders a politically charged bid to challenge Boeing for a deal worth up to $50 billion, sources familiar with the matter said.

EADS executives met a week ago with advanced plans to launch a bid with U.S. defence contractor L-3 Communications as its key supplier. But sources said the U.S. company had backed away leaving a sombre mood in the European camp.

"Overnight they went from positive to more negative," one person familiar with the matter said, asking not to be named.

L-3 declined on Thursday to comment about the talks.

An EADS spokesman said it continued to examine its options and declined further comment.

EADS shares were down 0.4 percent in late trading at 14.71 euros, outperforming the European market.

EADS had sought out a new ally after Northrop Grumman withdrew support last month. A U.S. partner is necessary to install classified systems on Airbus A330 jetliners which would be assembled and adapted for air tanker use in Alabama.

EADS and Northrop won a previous U.S. tanker contest in 2008, but the Pentagon cancelled the deal after government auditors upheld a Boeing protest and launched a new tender. Northrop decided not to bid for it, claiming the rules favoured Boeing.

EADS must say by May 10 whether it now intends to take part.

Only a handful of companies are seen as potential partners, and European analysts argued that Congressional elections in November created an additional hurdle for EADS.

"Given that the United States is looking more inward, the options for EADS are clearly running out," said Howard Wheeldon, senior strategist at BGC Partners in London.

"I am reluctant to say it is the end of the road, but I am hard pressed to find anyone else they can move in with as a junior or equal partner," the defence specialist added.

EADS officials are still in talks with some U.S. companies, including possibly L-3 and Raytheon Co, although time for sealing a pact is running out, according to several sources who were not authorised to speak on the record.

"Everything is open at this point," a senior source said.

Raytheon competes with European missiles maker MBDA, in which EADS has a stake. More crucially for its chances of taking part, it is seen as less hungry for a deal than smaller L-3 and may drive a hard bargain on any share of the spoils with EADS.

INDUSTRIAL BASE

Some U.S. analysts counter that EADS dug its own grave on the fiercely contested bid through its choice of plane and its funding history. It has been blasted in Congress after the World Trade Organisation ruled it had received unfair civil subsidies.

Airbus supporters insist the issues are not linked and claim a preliminary confidential verdict on a European counter-suit at the WTO, due in June, will be equally embarrassing for Boeing.

"Personally, I hope they don't bid," Norm Dicks, chairman of the House of Representatives Defense Appropriations subcommittee, said on Thursday.

"We've already had a competition. We know what their numbers are. I think that their plane's too big."

EADS supporters leaped on a report also quoting Dicks, a Democrat congressman from Washington, where Boeing would build some tankers, as saying he hoped U.S. firms would not join EADS.

A spokesman for Dicks responded he had not spoken directly to any potential EADS partners, but had "raised the rhetorical question of why any company would view the issue different than Northrop Grumman" when bidding with a bigger, costlier plane.

EADS is assessing whether it can narrow this gap by using the extra margin available to a senior bidding partner, a status granted to it by the Pentagon, instead of supporting Northrop.

However, analysts say that would still depend on striking a finely balanced deal with a supplier.

Wheeldon said the row may have long-term implications.

"Apart from (Britain's) BAE Systems, transatlantic consolidation led by Europe is now dead. There may still be some doors open to transatlantic consolidation led by the U.S., but not in the immediate future." (Additional reporting by Andrea Shalal-Esa)

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