The largest single shareholder in BAE Systems (BA.) has come out strongly against the proposed merger with EADS ahead of the expected release of further details on the deal on Wednesday 10 October.
Invesco Perpetual, which holds more than 13 per cent of BAE across a number of mandates, says it "does not understand the strategic logic for the proposed combination" other than diversification. It also has reservations about the implications of the deal for BAE's "unique and privileged position" in the giant US defence industry and sees no proposed benefits that would offset the threat to this. In particular, Invesco fears that the increased level of government ownership of the combined entity could hamper commercial prospects, in the US in particular.
Addressing financial concerns, Invesco points out that BAE's shares are at a historic low but believes more can be done to address this as a standalone company. It also believes the merger ratio, under which EADS shareholders would own 60 per cent of the combined business, is not reflective of BAE's superior cash generation and earnings stream. Concerns have also been raised over the ability of the combined group to continue paying a decent dividend given the disparity between the two businesses - BAE pays a 5.9 per cent yield compared with EADS's 2.3 per cent.
