BAE Systems: Invesco Warns Over EADS Merger Plan

The largest investor in BAE Systems has said it has “significant reservations” over the defence firm’s planned merger with Franco-German group EADS.

Invesco Perpetual, which owns 13.3% of the UK company, said in a statement that it “does not understand the strategic logic” of the deal.

Invesco added that it was “very concerned” about the level of state shareholding in a combined group.

On Wednesday, BAE and EADS are due to say if they will continue their talks.

Invesco said that it “believes the merger would materially jeopardise BAE’s unique and privileged position in the United States defence 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 US – and result in governance arrangements driven more by political considerations than shareholder value creation.”

BAE and EADS face a number of hurdles if the deal is to go through, with France and Germany keen to keep significant equity stakes in the merged group.

And UK Prime Minister David Cameron is facing a Conservative rebellion after 45 MPs signed a letter calling on him to veto the deal.

Although BAE and EADS have presented the tie-up as a merger, one contentious issue is that EADS shareholders would end up with 60% of the new group, and BAE shareholders the rest.

“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 said.

The investment group concluded that BAE Systems had “strong” prospects as an independent company.

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

BBC