U.K. defense contractor BAE Systems and European aerospace giant EADS, the parent company of Airbus, are in talks about combining into the world's biggest aerospace company.

The merger could strengthen EADS in its bid to challenge Boeing and other U.S. defense companies for U.S. military contracts. It would also create a giant with revenues far exceeding either Boeing or Lockheed Martin, the world's top defense contractor.

The companies said Wednesday the proposed merger would unite their boards and management, with BAE Systems shareholders owning 40 percent and EADS shareholders 60 percent of the enlarged group.

Loren Thompson, a defense analyst with the Lexington Institute and a longtime consultant to BAE, said the combination would bolster EADS on the defense side, especially in the U.S., and create a company with a better balance between its commercial and defense operations.

"If this transaction actually goes forward, it would position the combination to compete more effectively across the entire global marketplace," he said.

EADS, which has been successful in selling military systems and weapons outside the U.S., has long sought to increase its presence in the world's biggest defense market and win more Pentagon business.

Its chief obstacle to that ambition has been Boeing, which last year finally wrested the Air Force refueling-tanker contract away from EADS after a protracted and highly political competition.

BAE, although headquartered in the U.K., has extensive defense units in the U.S. and generates about half its revenue here.

In the current fiscal year it is the seventh largest supplier to the Pentagon, after Lockheed Martin, Boeing, General Dynamics, Raytheon, Northrop Grumman and L3 Communications.

Nevertheless, Thompson said, the proposed merger will "raise basically no antitrust issues in the U.S. because the combination would still have a relatively small footprint compared to the other U.S. suppliers."

Data on Pentagon spending so far for the fiscal year that ends Sept. 30 shows Lockheed as the top defense contractor, with a share of just less than 10 percent, according to defense-consulting firm Barr Group Aerospace.

Boeing has 8.5 percent. BAE's share is just 1.6 percent and EADS is way down the list of suppliers at 0.13 percent.

In 2011, BAE made a profit of $2.6 billion on sales of almost $36 billion. EADS made $1.3 billion on sales of almost $63 billion.

In comparison, in 2011 Boeing made a profit of $4 billion on sales of almost $69 billion. Lockheed earned $2.7 billion on sales of $46.5 billion.

In a statement to the London Stock Exchange confirming the discussions, BAE and EADS pointed to a "long history of collaboration" on projects such as the Eurofighter Typhoon jets, which are partly assembled in Britain and then built by EADS elsewhere in Europe.

BAE owns one-third of the Eurofighter holding company while EADS owns 46 percent of it.

BAE also makes Bradley armored ground vehicles and sophisticated military electronic and cyber systems.

BAE acknowledged in a statement the militarily sensitive nature of its global businesses and said it has initiated discussions with "a range of governments" about the implications of any possible merger with EADS, which is controlled by French, German, and Spanish shareholders.

The statement said the companies "envisage that certain of their defence activities would be ringfenced ... particularly in the USA."

This implies that when working on secretive-military projects, knowledge of U.S. classified information would not be available to units of the company operating overseas.

Under city of London regulations governing mergers, the two have until Oct. 10 to announce either that they have agreed to a deal or that they don't plan to pursue a merger.

Last month, U.K.-based BAE reported a slight dip in first-half profits and cautioned about its U.S. outlook amid uncertainty over military spending ahead of November's presidential election.

The Associated Press contributed to this story.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com