Invesco doubts BAE merger benefits

08 October 2012

The largest single shareholder in BAE Systems has expressed "significant reservations" over the benefits of a potential merger with European aerospace and defence firm EADS.

Invesco, which holds a 13.32 per cent share in BAE Systems, issued a statement saying that it did not see the "strategic logic" behind the merger move.

BAE Systems and EADS announced their intention to hold merger talks in September, and have until 10 October to decide whether talks will continue. A number of major hurdles to the merger, including the need for national approval from four governments and arguments over the division of shares in the combined firm, have come to the fore in the days since the announcement.

"Other than diversification – which investors can achieve for themselves more cheaply and simply – Invesco does not understand the strategic logic for the proposed combination," the firm said in a statement.

The firm also said that it feared the merger would "materially jeopardise BAE's unique and privileged position in the United States defence market", adding that it had "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."

"Invesco believes BAE is a strong business with distinctive positions in the global defence market (especially in the US and UK) and good standalone prospects. We look forward to discussions with the board of BAE and other BAE shareholders in the coming days."

Invesco Perpetual fund manager Neil Woodford reportedly held a meeting with BAE Chief Executive Ian King shortly after the deal was announced in order to express his concerns.

Another investor reportedly told The Financial Times the deal was "close to collapsing".

The issue of state control is causing considerable concern. On Sunday, Defence Secretary Philip Hammond said the UK would be prepared to use its 'golden share' in BAE Systems to block the merger if 'red line' commitments were not met.

"We want to see this company prospering as a commercial business, focussed on doing things that are right for the business, not beholden to or controlled by any one government," he told the BBC.

"It is not necessary to have no French or German government interest in the company. It is necessary to reduce that stake below the level at which it can control or direct the way the company acts," he added.