BAE’s Biggest Shareholder Questions Logic of EADS Merger

Oct. 8, 2012 Defense news (AFP)

LONDON — Fund manager Invesco Perpetual, the biggest single shareholder in British arms maker BAE Systems, warned Oct. 8 it had “significant reservations” over a tie-up between the group and European aerospace giant EADS.

The snag to the blockbuster deal came one day after British Defence Minister Philip Hammond warned that Britain could use its “golden share” in BAE to block the merger unless France and Germany limited their stakes in the future company.

The political wrangling and Invesco’s concerns come ahead of an imminent deadline for a BAE/EADS merger which would create the world’s top group in the fields of civil and military aerospace.

The two firms have until Oct. 10 — a British stock market deadline for a blueprint of the deal — to make a formal statement to say that the proposed deal is going ahead, being abandoned, or to request a delay.

In an indirect reference to Berlin and Paris, Invesco, which owns 13.3 percent of BAE, said it was “very concerned” that the level of state holdings in the new group would affect its commercial position — particularly in the key U.S. market.

“Invesco does not understand the strategic logic for the proposed combination,” the British fund manager said in a strongly-worded statement.

“Invesco believes the merger would materially jeopardize BAE’s unique and privileged position in the United States defense market, and has been unable to identify any corresponding benefits to offset this.

“Invesco is very concerned that the level of state shareholding in the combined group will heavily impair its commercial prospects — especially in the United States — and result in governance arrangements driven more by political considerations than shareholder value creation.”

In reaction, a source familiar with the deal said BAE would not allow a deal that hurt its U.S. activities.

“BAE Systems will not allow the merged company to be driven by political considerations, and would not support a transaction that would jeopardize its business in the United States,” the source told AFP.

“The company remains committed to the deal. They want to move to a position where they can disclose the full terms of the transaction. They will clearly take on board the views of shareholders.”

EADS, which makes Airbus jets, and BAE Systems announced last month that they wanted to create a $45-billion (35-billion-euro) giant to rival U.S. rival Boeing but Berlin, Paris and London each has a veto right on the merger negotiations.

BAE and EADS have presented the tie-up as a merger, but one bone of contention is that EADS shareholders would end up with an overall 60-percent interest in the new group. BAE would have a 40-percent holding.

“The merger ratio does not reflect BAE’s superior cash generation, or the quality of its earnings stream, derived from the length and nature of its customer contracts,” Invesco added Oct. 8.

It warned also that shareholder dividends might not be a priority for the new group, while the dual-listed structure could hit potential synergies.

“Invesco believes BAE is a strong business with distinctive positions in the global defense market — especially in the U.S. and UK — and good stand-alone prospects,” it said.

France holds a 15-percent share of EADS which would be diluted to nine percent in the new entity. Germany wants the right to buy a nine-percent stake in the new group to maintain parity with France.