RNS Number : 1095O
08 October 2012
Statement on EADS/BAE merger
Invesco Perpetual ("Invesco") has noted the announcement last month of the proposed merger of EADS and BAE Systems ("BAE" or "the Company"). Funds managed by Invesco own approximately 13.3% of BAE's ordinary share capital, making it the largest shareholder in the Company.
While full details of the proposal are awaited, Invesco has noted the deadline imposed by the Panel of 10th October 2012. In view of the importance of the possible merger to the future of BAE and the size of Invesco's holding, Invesco considers it appropriate to outline its significant reservations regarding both the proposal and its impact on long term value for BAE shareholders.
Invesco's reservations include:
Strategy and structure
· Other than diversification - which investors can achieve for themselves more cheaply and simply - Invesco does not understand the strategic logic for the proposed combination.
· Invesco believes the merger would materially jeopardize 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 United States -and result in governance arrangements driven more by political considerations than shareholder value creation.
· The proposed dual listed structure ("DLC") perpetuates the predecessor company identities and thus impedes synergies. It also divides share trading between two markets and therefore deprives the enlarged group of the benefits of a single deep pool of liquidity. This is why most of the recent DLC's have been subsequently dissolved.
· BAE shares are trading at historic low multiples (also low relative to the peer group) and we believe BAE can deliver significant standalone upside value for its existing shareholders from these levels.
· 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.
· BAE's current dividend yield of 5.9% is more than double that of EADS's yield of 2.3%. The initial announcement did not provide any visibility for dividends beyond 2013, and Invesco are 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 in the future.
· The two CEO's emphasized recently that "the rationale that drives this transaction is growth". While growth is important, it should not be at the expense of cash flow and returns, which are even more important drivers of long term value creation.
Invesco has, on and off, owned shares in BAE for over twenty years. 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.
We look forward to discussions with the Board of BAE and other BAE shareholders in the coming days
Invesco is being advised by Ondra Partners
Ondra Partners +44 20 7082 8750
Philip Gawith +44 20 3178 6760
Anthony Silverman +44 20 3427 5381
1. 432,010,523 shares of BAE Systems are held in funds by Invesco Perpetual Henley and 432,329,428 by Invesco in total
2. 2,304,294 shares of EADS are held in funds by Invesco Perpetual Henley and 3,846,899 by Invesco in total
3. Recent dealings in BAE since 1st September 2012 result in aggregate purchase of 10,695,436 shares at an average price of 328.2p and sale of 650,605 shares at an average price of 335.8p
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