Invesco warns over EADS tie-up

LONDON: Fund manager Invesco Perpetual, the biggest single shareholder in British arms maker BAE Systems, warned yesterday it had "significant reservations" over a tie-up between the group and European aerospace giant EADS.
The news came one day after British defense minister Philip Hammond declared 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 Wednesday — 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 said it was "very concerned" that the level of state holdings in the new group would affect its commercial position — particularly in the key US market.
Funds managed by Invesco own approximately 13.3 percent of BAE's total share capital.
"Invesco does not understand the strategic logic for the proposed combination," the company 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 that BAE would not allow a deal that hurts its US 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 US 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 yesterday.
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 US 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.
In late afternoon deals on Monday, BAE's share price slid 0.52 percent to 326.40 pence on London's FTSE 100 index of top companies, which fell 0.53 percent at 5,840.75 points.
Across in Paris, EADS shares slid 0.91 percent to 26.24 euros on the CAC 40 index, which was down 1.0 percent at 3,422.29 points.