Invesco Perpetual Slams BAE Systems/EADS Merger

Published in Company Comment on 8 October 2012

Invesco Perpetual doesn't understand the 'strategic logic' behind BAE Systems merging with EADS.

BAE Systems (LSE: BA) dipped 3p, or 1%, to 325p this morning after institutional investor Invesco Perpetual slammed the group's proposed merged with EADS.

Invesco, which is BAE's largest shareholder with a 13% stake, said today that it was "appropriate to outline its significant reservations regarding both the proposal and its impact on long-term value for BAE shareholders".

In a critical statement, Invesco admitted it did not understand the "strategic logic" behind the proposed combination.

In particular, Invesco reckoned the merger would "materially jeopardise BAE's unique and privileged position in the United States defence market", and said it was concerned the level of state shareholding at a combined BAE/EADS would "result in governance arrangements driven more by political considerations than shareholder value creation".

Invesco claimed BAE could instead deliver "significant… upside value" for shareholders on a standalone basis, and that the proposed merger ratio "did not reflect BAE's superior cash generation, or the quality of its earnings stream, derived from the length and nature of its customer contracts."

Of particular interest to Neil Woodford, Invesco's legendary equity income investor, is that BAE's 5.9% dividend yield is more than double that of EADS's yield of 2.3%.

Indeed, Invesco said today that BAE's initial announcement "did not provide any visibility for dividends beyond 2013", and that it was "very concerned that shareholder dividends will not be prioritised in the combined group, with BAE shareholders then facing a significant drop in their dividend income."

According to Invesco's latest reports, Neil Woodford's Invesco Income and High Income portfolios own an aggregate 284 million BAE shares, which currently carry an £858 million market value and represent nearly 4% of Mr Woodford's investment funds.

Invesco as a whole owns 432 million BAE shares on behalf of institutions and retail clients, and today described BAE as "a strong business with distinctive positions in the global defence market and good stand-alone prospects."

Certainly it seems Neil Woodford and Invesco Perpetual are keen on BAE -- albeit without EADS. So there may be a buying opportunity lurking here, especially if Invesco manages to derail the merger and BAE's shares drop lower.

Mr Woodford, of course, has a sensational track record of picking winning FTSE shares that come backed with solid dividends. During the 15 years to 2011 for instance, his favourite large-caps produced a 347% gain -- equivalent to more than eight times the return of the wider market.

You can learn more about Mr Woodford's enormously successful dividend-investing approach by reading this exclusive Motley Fool report. The report is full of valuable income insights and is free to download by clicking here.

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> Maynard does not own any share mentioned in this article.

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apprenticeDRL 08 Oct 2012 , 12:23pm

As a BAE shareholder albeit with a significantly smaller holding than Investco, I do agree with the sentiments and I am hoping that the proposed merger doesnt go through for a variety of reasons.

gadjet2 08 Oct 2012 , 2:54pm

I have shares in BAE and agree that the logic seems suspect. I believe this matter will run and run, so I'm content to sit on the fence for the time being.

ScottishPound 08 Oct 2012 , 4:52pm

If it was simply a merger between UK, German and French companies then that might be ok, but when the German and French governments have large stakes and the UK Government has no stake, then I think it is a non-starter with too much risk for UK jobs and technology.

kiffberet 09 Oct 2012 , 7:47am

I don't know the details of the deal, but I 'hope' the management have put aside a few hundred million pounds to retain themselves after the deal goes through. That's how good they all are!
Granted, I can't remember the last time a giant merger worked in the favour of shareholders, I'm sure this management team will be different and therefore worth every penny.

On a side note, we'll done on linking a story to the blessed Neil Woodford without just cut and pasting the standard paragraph from all the other stories at the bottom...

goodlifer 09 Oct 2012 , 7:49pm

There seem to be an awful lot of question marks about Mr Woodford these days.
How can we be sure his luck hasn't run out, as Mr Benson's apparently has?

Or am I thinking the unthinkable?

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