U.K. defense contractor BAE Systems PLC (PINK: BAESY) said it's in talks with European Aeronautic, Defence & Space Co., the parent of Airbus SAS, about a possible merger that would create a European counterweight to U.S. companies including The Boeing Company (NYSE: BA).

Shares of BAE Systems PLC (PINK: BAESY) jumped 11.41 percent, to $23.54, in Wednesday's midday trading. EADS NV (EPA: EAD) closed down 5.63 percent, to €28, in Paris. The news came after markets in Europe closed.

"Both companies would operate as one group by means of equalization and other agreements but would be separately listed on their existing exchanges," BAE said in a statement. A combination would have a joint market cap of $48 billion based on Tuesday's closing prices.

In a potential merger, BAE Systems shareholders would own 40 percent and EADS 60 percent of the new firm, which would have a unified board and management structure with identical boards and executive committees at BAE Systems and EADS.

The discussions have been initiated with a range of governments about the implications of the potential transaction. The deal would need the approval of the German, French and particularly the U.K. government. However, it would also need the approval of the U.S., which is BAE's biggest customer.

EADS would pay £200 million ($321.4 million) to its shareholders prior to completion. BAE's and EADS's normal dividend payments in respect of 2012 would be unaffected. In respect of 2013, it is envisaged that the combined group would declare dividends such that BAE shareholders would receive an equivalent amount to that declared in respect of 2012. Dividend policy for 2014 and beyond would be a matter for the board of the combined group.