BAE pays price for having no deal to sell

Scattergun 08 October 2012 | By Quentin Webb Context News On Oct. 8 Invesco Perpetual, the biggest shareholder in BAE, said it had “significant reservations” about the London-listed defence group’s planned merger with EADS. “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 fund manager said in a statement. BAE Systems is paying the price for having no deal to sell. The UK defence group’s largest shareholder, 13.3-percent-owner Invesco, has taken aim at the still-to-be-agreed merger with EADS. Keeping everyone onside when deals leak ahead of time is always tricky. And nowadays, angry investors can seem almost de rigueur for big M&A. Still, Invesco’s intervention shortens the odds on a management clearout at BAE if the tie-up fails. British takeover rules mean the two sides, who have no formal agreement yet, cannot sell the combination to shareholders in too much detail (unless investors agree to be designated as insiders and forbidden from trading shares). What’s more, there are still plenty of details to be agreed. The information vacuum has been rapidly filled by politicians from Britain, France and Germany, followed by former executives, defence gurus, and a handful of small shareholders. Now enter Neil Woodford, Invesco’s income-investing giant. Taking a scattergun approach, Woodford lays into everything about the deal from the basic strategic logic, to its structure, merger ratio and even the two chief executives’ growth focus, which he sees coming at the expense of returns. That recalls previous investor broadsides against Prudential and G4S, among others. Some charges are weak, such as worries about the sustainability of dual listings; other concerns, such as potential damage to Pentagon relations, would surely be addressed before BAE could agree to any final deal. Fundamentally, Woodford worries that this high-yielding portfolio stock will take the hatchet to its dividend, and that BAE is selling out too cheaply, given the contrast between low valuation multiples and the long, cash-generative contracts it enjoys. Maybe BAE can indeed forge ahead alone: over the next couple of years analysts generally reckon BAE can grind out a very small increase in revenue. Still, some former executives such as ex-CEO Mike Turner suggest things could actually get trickier as existing programmes end, especially in the UK. If BAE ends up with no deal - which is looking increasingly likely - it won’t be easy to return to the status quo. The market will rightly be worried about the grim standalone diagnosis from the likes of Turner. But with management under attack for buying U.S. growth at high prices, a transaction-based answer looks harder. BAE’s leaders, starting with Chief Executive Ian King, could soon need their own defence.