BAE Systems and EADS, the maker of Airbus, late Wednesday disclosed talks about a combination that would create a European aerospace powerhouse with a market value of more than $40 billion. However, with EADS counting three European governments as key stakeholders and the U.K. holding a special share in BAE Systems, the regulatory outlook appears complex, even if antitrust issues aren't seen as posing a major obstacle. Complications may also arise from BAE's special status with the Pentagon that allows it to be treated as a domestic acquirer.

"There are a whole lot of intangibles," said Paul Mumford, a fund manager at London-based Cavendish Asset Management Ltd., which holds BAE shares.

"There are obviously going to be some benefits from becoming a larger organization and there will be less exposure to the defense sector but it wouldn't surprise me to see the process going on for months," he added.

French media group Lagardère SCA, an EADS shareholder, pledged Thursday to scrutinize the planned merger.

"In the light of available information, the Lagardère group intends to ensure that all consequences associated with the proposed EADS NV-BAE Systems plc merger are taken into consideration in determining the terms and conditions of the proposed transaction before it consents to the deal," it said.

BAE shares were down 27.5 pence, or 7.6%, by midafternoon in London, giving the company a market value of £10.9 billion ($117.6 billion). EADS shares in Paris fell almost €2.54, or 9.1%, to €25.46, putting a €21.1 billion ($27.2 billion) price tag on its equity.

Lagardère holds an indirect 7.5% stake in EADS through a holding company it co-owns with the French government. The holding company, Sogeade Gérance, owns 22.35% of EADS, as does Germany's Daimler AG. Germany confirmed earlier this month it would buy at least part of Daimler's stake in EADS by year's end.

The German economy ministry told journalists Thursday it was also looking into the EADS-BAE merger proposal. The U.K. government also said it's studying the plan but declined to elaborate.

Spanish state holding company SEPI holds 5.45% of EADS.

Reuters reported that France, Germany and the U.K. would gain special shares in the enlarged entity, which would enable them to block a hostile takeover of the company.

EADS, which is registered in the Netherlands, is led by CEO Tom Enders; his counterpart at BAE is Ian King.

The aviation companies' merger plan entails the creation of a dual-listed entity with a combined €72 billion in sales and more than 200,000 employees. Specific terms are still being discussed, but the companies said that if a deal is completed holders of Farnborough, England-based BAE would own about 40% of the combined company. The transaction still needs clearance from the merger partners' boards.

Under the U.K. Takeover Code, the companies have an initial Oct. 10 deadline to announce a firm deal or abandon plan, though they said Wednesday they may seek an extension to that 28-day time frame.

Should the deal happen it would create a sprawling commercial and military defense contractor with operations spread across France, Germany, Spain, the United Kingdom and the United States, and would create a European company with the size and the reach to compete head on with the likes of U.S. titans Boeing Co. and Lockheed Martin Corp. EADS is focused primarily on commercial aerospace, where its Airbus SAS unit is Boeing's archrival, while BAE has a large defense business manufacturing tanks, warships and fighter jets. BAE was until 2006 a 20% shareholder in EADS's Airbus unit.

The negotiations come as defense contractors throughout the Western world are bracing for expected cutbacks as governments embrace austerity programs. While defense spending is expected to decline, commercial aerospace appears to be on an upswing, as newly healthy airlines look to replace their aging fleets with newer, more fuel efficient aircraft.

The push into commercial aerospace has already generated one large deal, United Technologies Corp.'s $18.5 billion purchase of Goodrich Corp., which closed earlier this summer. If the EADS-BAE fusion comes to pass, analysts expect a new wave of big-ticket defense industry mergers.

EADS is taking advice from a Perella Weinberg Partners team led by Dietrich Becker and from Evercore Partners Inc. BAE Systems' advisers include Morgan Stanley, Gleacher Shacklock LLP and Goldman, Sachs & Co.