Shares in BAE Systems slumped today as analysts were divided over whether the group was being bought on the cheap in its £30 billion megamerger with Airbus’ pan-European owner Eads.
When news of the deal, which would create the world’s biggest aerospace and defence company, broke yesterday afternoon, BAE’s stock rose more than 10 per cent to finish on a two-year high. However, most of that gain had been wiped out by 10am following a research note by Espirito Santo Investment Bank which argued the talks “highlight the cheap valuation of BAE” and that other “strategic suitors” could emerge.
Under the terms of the deal, which must be approved by the German, French, Spanish and British governments, BAE shareholders would own 40 per cent of the combined group with Eads’ investors taking the balance.
In particular, the merger, which would see the companies remain relatively operationally independent but with a parent executive board based outside of the UK, gives Eads access to the US defence market. Despite forthcoming budget cuts, the US government remains the most important defence client in the world and BAE has established a strong foothold there while Eads has focused on Europe.
However, Société Générale’s aerospace analyst, Zafar Khan, argued that with cash-stricken governments slashing their military costs, BAE needed Eads, which is heavily focused on civil aviation, more than the other
way around.
BAE sold its 20 per cent stake in Airbus six years ago, so the current talks suggested that strategy had proven to be “flawed”.
Yesterday’s announcement shocked BAE and Airbus workers, of which there are nearly 50,000 in the UK, as well as investors.
This morning, Unite, the country’s biggest union, was demanding urgent talks with Defence Secretary Philip Hammond and Business Secretary Vince Cable to ensure jobs would be safe.
Under takeover rules, the companies must announce the results of their discussions by October 10.
