Frustrated investors try to weigh up EADS-BAE deal

By Jane Barrett

LONDON, Oct 8 (Reuters) - Investors in EADS and BAE Systemsare increasingly frustrated at the political wrangling overtheir proposed, $45-billion merger, concerned they are beingfrozen out of the decision-making and are unable to run theirnumbers.

Since news leaked out about talks between EADS andBAE last month, fund managers say they have been givenvery little information about the merger and are stillscratching their heads as to its value.

"With the cost savings, they've not come out and said it'llbe a billion or half a billion. That's where I can't sit downand run my spreadsheet and say whether that's really goodvalue," said a fund manager from one of BAE's top shareholders.

"If they want backing for this, they're going to have togive us more detail."

EADS and BAE have been discussing a merger that would helpinsulate EADS from the ups and downs of the aerospace cycle andgive BAE investors a more diverse business as governments aroundthe world cut their defence budgets.

Negotiations have been held up by the French, German andBritish governments wrangling over the extent of their influencein the new company. Under British takeover rules, EADS and BAEhave until close of business on Wednesday to make enoughprogress to warrant extending the talks.

DIFFERENT GOALS

While the smoothing of business cycles might make sense froma corporate strategy point of view, investors have put money inthe stocks for other reasons that may now become obsolete.

BAE, with its long-term contracts and cash flow, has been ahealthy dividend stock, paying out just over half its net incomeand giving a dividend yield of 5.9 percent based on 2011 profit.

EADS pays out just over a third and has a dividend yield of2.2 percent, but it has been a profitable growth stock with itsshares up 39 percent in the year before news of the talks cameout on Sept. 12. BAE stock was up just over 20 percent.

"If this merger were to happen, they would have to have asustainable dividend policy of a yield of 4-4.5 percent - whichwould be a big increase for EADS - because without that you'reprobably not going to take any of the UK shareholders with you,"said one of BAE's top 30 investors, who asked not to be named.

While some fret about the dividend, others focus on growth.EADS is benefiting from an upswing in civil aerospace thanks togrowth in emerging markets and a push for more fuel-efficientaircraft; BAE, on the other hand, is suffering from cuts indefence budgets among its government customers.

According to Starmine, which weights analysts' forecastsdepending on their past accuracy, EADS should book revenues of54.5 billion euros this year, up 11 percent from 2011, with netprofit rising about 48 percent to 1.5 billion.

BAE revenues, on the other hand, are seen flat at 19 billionpounds with net profit up about 5 percent to 1.3 billion pounds.

EADS shares trade at a forward price to earnings ratio of10.79 times while, on a similar basis, BAE trades at a p/e of8.11.

"At the moment, EADS has a lot of potential but is not aneasy company to manage. It has a lot of civil aerospace projectsin the pipeline that are very complex and will take a lot ofmanagement time," said Barry Norris, chief investment officer atArgonaut Capital Partners, one of EADS' top 40 investors.

"To add this extra layer of complexity by merging twodefence businesses is something that EADS just doesn't need."

(Additional reporting by Chris Vellacott and Sinead Cruise;Editing by Alastair Macdonald)

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Keywords: EADS BAE/INVESTORS