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Miffed Woodford hits out at BAE-EADS merger

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Miffed Woodford hits out at BAE-EADS merger

Invesco Perpetual’s Neil Woodford has told BAE Systems he has ‘significant reservations’ about the firm’s planned €35 billion (£28 billion) merger with EADS.

Invesco owns more than 13% of BAE, the lion’s share of which is held through Woodford’s Income and High Income funds.

In a statement posted on the London Stock Exchange Invesco said it could not see the strategic logic for the proposed combination, other than diversification, which it pointed out investors can achieve for themselves more cheaply and simply.  

Invesco highlighted a number of reasons why it believes the merger is a bad idea. They include:  

* The merger would materially jeopardise BAE's unique and privileged position in the United States defence market, and has been unable to identify any corresponding benefits to offset this.

* 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.

Invesco also sees a number of financial flaws in the deal   

* 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 emphasised 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 said it intends to work with other shareholders over the next few days.  

'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,' the statement said.

'We look forward to discussions with the Board of BAE and other BAE shareholders in the coming days.'

At 9.45am shares BAE Systems were down 1.31% at 323.8p.

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