BAE and Eads scramble to woo investors to merger

Eads chief executive Tom Enders and BAE Systems counterpart Ian King have hit the phones in a charm offensive to convince investors to back a $48bn merger to create a global aerospace and defence giant.“Don’t panic” has been the message from the two men after shares in both companies dropped on Thursday with investors questioning the logic of combining the two companies.In conference calls with BAE and Eads management, several top investors expressed unease over a lack of detail on cost savings, political involvement in a combined group and — crucially — its long-term dividend policy.“What investors want is more details on the dividend policy especially because BAE provided them high returns over years,” said one source close to the talks. “They also want more details on where the synergies will come from and how big they will be.”The fact that news of merger talks leaked earlier this week, causing the pair to issue a hastily compiled statement, prevented the two companies telling shareholders the full story, according to the same source.Although they are under pressure from investors to come up with a full merger plan, that will first need approval from the companies’ government backers. In the meantime, Britain’s strict takeover rules limit what they can say to reassure investors in private, a second source close to the talks said.The commitment to give Eads shareholders £200mn ($320mn) as a special dividend should be seen as a sign that the combined group’s future dividend policy would be in line with BAE’s, the source said. “Shareholders will be positively surprised,” he added.BAE’s King has urged investors to stay calm and has also promised “positive surprises” from the proposed deal.Eads’ Enders has been pushing the message that a combined group could absorb the cyclical ups and downs in the global defence and aerospace markets.At the moment, Eads’ aircraft-making unit Airbus is booming — backed up with orders from emerging nations in Asia. BAE, however, is bracing itself for more cuts in defence budgets in the US and Britain.Some Eads shareholders, reaping the rewards of the investment in Airbus, are angry the benefits could be shared with shareholders of BAE, exposed to government defence budgets and with limited short term growth prospects.The complex security arrangement BAE has with the US for its work on sensitive government programmes was likely to scupper a deal anyway, said Klaus Kaldemorgen, a fund manager at DWS Investments - Eads’ 12th largest shareholder.“The US are very picky when it comes to choosing their defence contractors. With the merger, a British supplier will become a European one. That is something different,” he said.Investors in both companies worry about the level of political influence within a combined Eads-BAE — especially from France and Germany, which both have a stake of 22.5% in Eads.Enders sees the tie-up as a chance to reduce government influence within a more commercial business.The two companies propose that French, German and British governments would each have a golden share, allowing them to block hostile takeovers but giving no additional veto rights or the ability to nominate members of the combined group’s board.This move has not appeased all shareholders.One of the 30 biggest investors in BAE cited concerns over the “cultural complexity” of a combined group.Investors are also concerned that political obstacles could delay the all-important shareholder meeting beyond October given the number and importance of the countries involved.A source close to the British company said BAE and Eads would likely go on a combined roadshow to sell the deal, but they wanted to iron out more details before then and the roadshow was not expected before next month. Major investors in the two companies are scattered in London, Paris, Brussels and Frankfurt as well as in the US.Shares in Eads and BAE, which closed 10.1 and 7.3% down on Thursday, rallied yesterday morning. BAE shares in London were 3.7% up by 1100 GMT, while Eads shares were trading 1.3% higher in Paris.The consensus among hedge funds is that the deal will eventually go through.Institutional investors sold massively on Thursday and that created an opportunity for hedge funds to buy Eads shares on the cheap, according to one hedge fund trader.“Hedge funds hope to make a 4% return if the deal goes through and up to 10% if it fails,” he said.