By Helen Massy-Beresford in London
The Airbus A380 production debacle that has wiped billions off EADS’s market value and forced the departure of two of its most senior executives has cast a dark shadow over the centrepiece of BAE Systems’ expansion strategy – US defence market acquisitions. It is difficult to see – with the benefit of hindsight – how the timing of the UK manufacturer’s decision to exercise its “put option” to dispose of its 20% stake in Airbus could have been worse.
BAE Systems admits it is “disappointed” with the €2.75 billion ($3.44 billion) valuation that Rothschild, the bank appointed to put an independent price on its Airbus stake, has decided. And investors seem to agree, with the company’s shares taking a tumble immediately after the figure was revealed (see graph).
The company’s board of directors had been due to meet to decide whether to recommend that its shareholders accept or reject the deal, but the convoluted saga has taken another turn, with BAE serving notice on Airbus of its intention to carry out an audit on the aircraft manufacturer. The audit is not expected to be completed before the end of August, BAE says. “BAE Systems expects that the audit will assist its board in assessing whether or not to recommend that its shareholders vote in favour of the proposed disposal,” the company says.
The UK-based company is now holding fire until the results of the audit. “A circular setting out the board’s recommendation to shareholders and further details regarding the proposed disposal will be sent to shareholders after the board has had the opportunity to review the outcome of the audit,” it says.
The company adds that the audit “will consider and provide confidence in the criteria determining the basis of forecasting the outlook for the Airbus business, including the financial effects resulting from the recent A380 programme slippage announced by EADS”.
So BAE could still decide to walk away from the deal and seek another route to disposing of its share in Airbus to EADS. But that course of action would have serious consequences for its future strategy. Recommending that shareholders block the sale would leave BAE management free to return to EADS in the hope of securing a deal at a better price.
Although BAE has never given an indication of the price it expects EADS to pay for the stake, the €2.75 billion recommendation by Rothschild falls far short of the €3.5 billion EADS itself put on the stake at its annual results presentation in March.
But BAE will have to think carefully about bringing EADS back to the negotiating table. “Advising shareholders to reject the current price will not be an easy call for BAE to make,” says analyst Ben Fidler of Deutsche Bank.
“To stop the sale, BAE management would have to be confident that they had sufficient leverage with EADS to pursue a sale at a better price through a negotiated route, which had previously failed. If negotiation were to once again fail, BAE would then run the material risk of being left holding the Airbus stake heading towards a civil downcycle and then unable to pursue further US deals – which is unlikely to be an appealing prospect,” he says.
But EADS’s desire to own 100% of Airbus as it seeks to bring the aircraft manufacturer under tighter control following its A380 troubles, attributed in part to a lack of communication between Airbus and EADS management, could make this route more feasible for BAE.
However, “EADS management would have a very tough task with its own shareholders convincing them of the merits of paying a higher price for BAE’s Airbus stake than Rothschild’s derived price,” Fidler points out.
BAE will have to weigh up whether it can negotiate a large enough increase in price to justify the risk of discarding a solution that at least offers the certainty that EADS will purchase the stake and thus give BAE the buying power it needs to pursue its American dream.
Assuming that BAE does eventually decide to go ahead with its share sale, what will be the implications of the lower-than-expected valuation on its next step? BAE has not commented on what it intends to use the proceeds of the sale for – but it is widely believed that cash in hand will be channelled into acquisitions in the lucrative US defence market.
L-3 has been touted as a potential takeover target – so would the disappointing proceeds from a sale of its stake in Airbus rule this out? Some analysts believe the company is more likely to make a number of smaller acquisitions in the US market.
Whatever happens, it is now certain that BAE and EADS will have to wait until at least the end of August for the next installment in a saga which could shape their respective strategies for years to come.
Source: Flight International
