Associated Press

The EU opened an in-depth probe into Thales SA's plans to buy Alcatel SA's satellite and security operations Tuesday, saying the combined company could increase costs and push out rivals who make telecoms satellites.

"Space is a key sector for the European high-tech industry," said EU Competition Commissioner Neelie Kroes. "The impact of this major restructuring needs to be carefully assessed to ensure that competition is preserved."

The European Commission said it must decide whether to block or clear the deal by an April 17 deadline. It often demands that companies under investigation sell off units or make binding promises to change the way it does business.

Thales, a French electronics and defense company, has offered cash and shares to acquire Alcatel's shares in two satellite companies, Alcatel Alenia Space and Telespazio, currently jointly controlled by Alcatel and Italy's Finmeccanica SPA.

The deal keeps sensitive technology in French hands, aiming to smooth French government concerns as Alcatel focuses on its core telecom business and gears up to integrate the $13.4 billion purchase of Lucent Technologies Inc.

EU regulators said they were worried about the power Thales and AAS would have because Thales was the dominant supplier for traveling wave tubes -- a key component for telecoms satellites that amplify microwave signals before they are transferred to Earth. It has only one rival in that sector.

AAS makes satellite subsystems and components and is also a satellite prime contractor.

Regulators also flagged concerns over AAS' access to sensitive technical information that rival contractors have to provide to Thales and which AAS could use to trump them to win bids.

"The new entity Thales/AAS could have the ability and incentive to increase the costs of and discriminate against its downstream competitors in the supply of TWTs," the European Commission said. "Favoring its own downstream activities in TWT-based subsystem integration and in satellite prime contracting could reduce competition on the market."

Thales' offer to separate its TWT business from AAS, setting up firewalls and promising not to discriminate in supplying space TWTs, was "not sufficiently clear-cut to remove with sufficient certainty the serious doubts about the effects on competition," the EU executive said.

Regulators have already cleared a minor part of the deal involving Thales' purchase of Alcatel's rail signaling, supervision and systems integration.

The satellite deal sees Thales buying Alcatel's 67 percent stake in AAS and its 33 percent share of Telespazio.

Thales said the purchase will bring it an increase in revenue of more than 2 billion euros ($2.44 billion).

The deal comes amid fierce competition in the European defense industry. European Aeronautic Defence and Space Co. tried to muscle into Thales' satellite plans at the last minute, concerned that an Alcatel-Thales move would leave it sidelined.

Rival EADS introduced proposals to include its own Astrium satellite unit in a three-way operation, with reported backing from French President Jacques Chirac.

Alcatel's satellite businesses -- both joint ventures between Alcatel and Italy's Finmeccanica SPA -- include sensitive military technologies that would have to be placed under independent supervision to win French government approval for the Alcatel-Lucent tie-up.

New Jersey-based Lucent has made similar arrangements for its Bell Labs research arm -- which does work for the Pentagon -- by setting up a subsidiary overseen by three former top U.S. defense and intelligence officials.