BAE Systems Scraps EADS Merger


LONDON -- BAE Systems (ISE: BA.L) fell 2% to 319 pence during afternoon trading today after it terminated discussions with EADS about a possible merger.

The FTSE 100 member claimed it had become clear that "the interests of government stakeholders [in BAE and EADS] could not be adequately reconciled with each other."

BAE said the decision to end the talks followed "a great deal of constructive and professional engagement with the respective governments over recent weeks." The British defense contractor also claimed the merger would have produced "a combined business that would have been a technology leader and a greater force for competition and growth across both the commercial aerospace and defense sectors and which would have delivered tangible benefits to all stakeholders."

Such talk may not have changed the mind of Neil Woodford, the legendary equity income investor, who earlier this week slammed the proposed merger by saying it "did not provide any visibility for dividends beyond 2013," and that he was "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."

Woodford also reckoned a merger with EADS would have "materially jeopardised BAE's unique and privileged position in the United States defense market."

According to Invesco's latest reports, Neil Woodford's Invesco Perpetual portfolios own an aggregate 284 million BAE shares, which currently carry a 906 million pound market value and represent nearly 4% of Woodford's investment funds. Invesco as a whole is BAE's largest shareholder, with 432 million shares representing a 13% stake.

Certainly it seems Neil Woodford and Invesco Perpetual could be much keener on BAE now that the EADS discussions have been scrapped. Indeed, Woodford did say this week that BAE was "a strong business with distinctive positions in the global defense market and good stand-alone prospects."

That could be all you need to know to press the "buy" button.

Woodford, of course, has a sensational track record of picking winning FTSE shares that come backed with solid dividends. During the 15 years to 2011, for instance, his favorite large caps produced a 347% gain -- equivalent to more than eight times the return of the wider market. You can learn more about Woodford's enormously successful dividend-investing approach by reading this exclusive Motley Fool report. The report is full of valuable income insights and is free to download by clicking here.

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