Cautious welcome for BAE Systems merger with EADS

Fund managers have cautiously welcomed the proposed merger of defence giants BAE Systems and EADS.

The proposal was put forward by UK group BAE on September 12, and if it goes ahead would create the biggest aerospace company in the world, overtaking US giant Boeing.

Jupiter income veteran Tony Nutt holds roughly 2.3 per cent in BAE in both his £1.9bn Income fund and £520m High Income fund. He said the deal was a “strategic necessity” for BAE.

He added: “The company has suffered a low rating relative to global defence stocks and it has sensibly decided to diversify away from the defence sector rather than face the chill winds of defence cuts in the US. The merger will face significant scrutiny from government and regulators but it makes a great deal of sense.”

Matthew Tillett, co-manager of the £9m Allianz UK Unconstrained fund, said it was “too early” to draw conclusions about the deal but listed a number of questions which needed to be answered before investors could be happy with the deal.

“We think it is too early to draw any firm conclusions regarding the proposed merger with EADS as there are still a number of unanswered questions,” Mr Tillett said.

“What will the management structure of the combined business look like? To what extent will the strategy be free from political interference? And what will be the financial synergies from the merger?”

BAE Systems is a top-10 holding in both Allianz’s UK Unconstrained and £72m UK Equity Income fund.

However, Argonaut’s Barry Norris - whose European funds hold stakes in EADS - hit out at the deal, saying shareholders in the European company would be “rightly angry” that the benefits of its Airbus aeroplane project were to be shared with investors in BAE. Mr Norris added that BAE itself was “wholly exposed to government defence budgets” and had a “limited short term growth”.