BAE Systems Scraps EADS Merger

Published in Company Comment on 10 October 2012

BAE Systems (LSE: BA.) blames government stakeholders for the deal collapsing.

BAE Systems (LSE: BA) fell 6p, or 2%, to 319p during afternoon trading today after it terminated discussions with EADS about a possible merger.

The FTSE 100 (UKX) member claimed it had become clear that "the interests of government stakeholders [in BAE and EADS] could not be adequately reconciled with each other".

BAE said the decision to end the talks followed "a great deal of constructive and professional engagement with the respective governments over recent weeks".

The British defence contractor also claimed the merger would have produced "a combined business that would have been a technology leader and a greater force for competition and growth across both the commercial aerospace and defence sectors and which would have delivered tangible benefits to all stakeholders."

Such talk may not have changed the mind of Neil Woodford, the legendary equity income investor, who earlier this week slammed the proposed merger by saying it "did not provide any visibility for dividends beyond 2013", and that he 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."

Mr Woodford also reckoned a merger with EADS would have "materially jeopardised BAE's unique and privileged position in the United States defence market".

According to Invesco's latest reports, Neil Woodford's Invesco Perpetual portfolios own an aggregate 284 million BAE shares, which currently carry a £906 million market value and represent nearly 4% of Mr Woodford's investment funds.

Invesco as a whole is BAE's largest shareholder, with 432 million shares representing a 13% stake.

Certainly it seems Neil Woodford and Invesco Perpetual could be much keener on BAE now the EADS discussions have been scrapped.

Indeed, Mr Woodford did say this week that BAE was "a strong business with distinctive positions in the global defence market and good stand-alone prospects."

That could be all you need to know to press the 'buy' button.

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.

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

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ANuvver 10 Oct 2012 , 3:44pm

Imagine if it had gone through. US defence interests at the mercy of interminable Franco-German squabbling over everything from security issues to domicile, employment and taxation. To say nothing of an extra dose of currency fluctuation in the mix. A euro-shambles thankfully avoided.

Woodford again proves himself adept at activism and has been known to dump positions if companies move against his investment thesis. Very few of us have the clout for the former, but I think we can all learn from the latter.

apprenticeDRL 10 Oct 2012 , 4:50pm

Personally I am for once thankfull to Mr Woodford if in some small way he influenced the deal although personally I suspect the US may have had a larger say.

Anyway as a BAE share holder I am thankfull that the deal didnt go through.

AleisterCrowley 11 Oct 2012 , 11:39am

Good news, happy about this.

reinvestmentman 11 Oct 2012 , 4:40pm

Yes indeed,would much rather have BAE as a stand alone company .So hopefully the strong dividend stream from them can continue.

ANuvver 11 Oct 2012 , 6:14pm

Strong suspicion emerging that it was Merkel that, pardon the imagery, torpedoed the deal.

More broadly, all but one of the FOUR goverments with an interest had serious reservations, and the private investors don't seem to have been very keen either.

Hindsight is a wonderful thing, but the question now has to be: what was the board of such an internationally politically sensitive operation thinking? At very least, their acumen wrt consultation channels does not come out of this well.

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