Invesco Perpetual has reservations over BAE's planned merger with EADS

BAE shareholder Invesco expresses concern over merger

The largest shareholder in BAE has outlined "significant reservations" about the group's proposed £27.9bn merger with EADS.

Invesco Perpetual, which owns more than 13 per cent of BAE, said it did not understand the strategic rationale behind the deal with EADS, arguing that it could have a negative impact on BAE's position in the US, where it has unique access as a foreign firm to sensitive defence work.

"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," Invesco said, adding that it had, on and off, owned shares in BAE for over 20 years.

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

The statement, which analysts described as a comprehensive demolition of the strategic logic behind the deal, comes two days ahead of a UK stock market-imposed deadline for the two companies to set out a more detailed blueprint for the merger.

It also follows the rising tensions that spilled out into the public last week, sparked by the UK, France, and Germany jockeying over the role the state would take in what would be the world's largest aerospace and arms group.

Prime Minister David Cameron is facing a major Conservative rebellion after 45 MPs signed a letter calling on him to veto the deal.

Defence Secretary Philip Hammond warned that Britain would block the deal if key "red line" priorities were not met, including an ability to cap the influence the French and German governments would have on the new company.

The German government may also block the move, it has been reported, after demanding that its stake is equal to France's and that the newly merged company's head office should be in Berlin.

It is thought Germany is insisting on taking a 9 per cent stake to match France's holding.

Britain holds a "golden share" in BAE, meaning it can veto deals that are seen to put the public interest at risk, but is not thought to have made any demands for a direct equity holding in the enlarged company.

While Invesco has insufficient votes to block the deal, its decision to go public with its opposition is a significant blow to BAE at a time when other shareholders are reportedly unhappy at a lack of communication from the UK firm.

The fund manager, which has owned shares in BAE across a 20-year period, said BAE was a strong business with distinctive positions in the global defence market – especially in the US and UK – and good stand-alone prospects.

Setting out its objections under eight categories, Invesco said the structure of the deal would hamper synergies while the ratio did not reflect BAE's superior cash generation.

It also felt the level of state shareholding in the combined group would heavily impair its commercial prospects.

"Invesco believes 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," it said.

"Invesco is very 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."

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