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Germany's DaimlerChrysler Aerospace Finds Love a Second Time Around

After being spurned by British Aerospace, the German company will merge with Spain's state-owned Construcciones Aeronauticas.
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Still smarting after dream merger partner

British Aerospace

spurned it earlier this year, Germany's

DaimlerChrysler Aerospace

, or Dasa, is finding solace in the warm Mediterranean embrace of Spain's state-owned aerospace company,

Construcciones Aeronauticas

, or Casa.

The deal helps transform Dasa from a second-tier aerospace company to a competitor in Europe's rapidly consolidating industry. A combined Casa-Dasa (one wonders what sort of fare it might serve) would be a global player with annual sales of 9.8 billion euros and 53,000 employees. And it also steals a potential partner from rival British Aerospace, or BAe, as well as Italy's

Alenia Aerospazio

and France's

Aerospatiale Matra

, bolstering Dasa's wounded pride with a much-needed boost.

"While merging with Casa does not totally transform Dasa's position, it does confirm the company's continued attractiveness as an industrial partner," says Keith Hayes, a London-based analyst for

Goldman Sachs

, who maintains a market outperform rating on the stock. Goldman has an investment banking relationship with Dasa parent

DaimlerChrysler

(DCX)

.

Traders, while not head-over-heels about the deal, pushed DamilerChrysler shares to 87 3/4, a 0.4% rise, in New York trading on Monday.

Dasa ranks in the top 10 of the world's aerospace companies in terms of sales, a position it had hoped to protect through a proposed merger of equals with British Aerospace. But BAe decided to woo

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Marconi

, which infuriated Dasa, prompting it to label any future link-up with the British giant impossible. Any shared future, Dasa reckoned, would leave it as a very junior partner to BAe/Marconi, the world's third-largest aerospace and defense business after

Boeing

(BA) - Get Boeing Company Report

and

Lockheed Martin

(LMT) - Get Lockheed Martin Corporation (LMT) Report

.

The rub is that the sheer size of those two U.S. giants may force BAe and Dasa back together should they hope to compete on global scale. If Dasa were to hook up with Alenia or another second-tier player, an equal-footed partnership with BAe could become more realistic. Another possibility, however, would be for Dasa to immediately look to North America for its next strategic partnership.

"We sensed that Dasa were very keen to do this deal in order to regain momentum after the disappointment with BAe. Other options are still likely to be explored, including U.S. discussions," says Andrew Clifton, an aerospace analyst for

Merrill Lynch

in London. Merrill has had an investment banking relationship with Daimler in the past.

The deal also makes Casa-Dasa the largest partner in the consortia, comprised of Aerospatiale, BAe and Casa-Dasa, that make both

Airbus

(made up of Dasa/Casa, BAe and Aerospatiale) and

Eurofighter

. It also boosts the likelihood the unit will be spun off from its parent, industrial giant DaimlerChrysler, a sale that could be as early as next year.

Sepi

, Casa's parent holding company, appears eager to sell up to 40% of the combined company. Getting Casa-Dasa listed would help build momentum for Sepi's stated goal of divesting itself of the company within three years.

The new entity would likely be listed in both Frankfurt and New York, a move that would allow the company to use its shares as acquisition capital both in Europe or in North America. And as Dasa gets back into the consolidation game with new elan, British Aerospace may find it ruing the day that it scorned its German paramour.