BAE to return £500m following Airbus sale

BAE Systems is to hand back up to £500m to shareholders after confirming last night it will sell its 20 per cent stake in the commercial aircraft builder Airbus.

After a board meeting, BAE announced it had decided to bale out of Airbus because of the "challenging short- to medium-term outlook" for the business and the "significant" investment it would have had to make if it retained the shareholding.

The decision to sell the 20 per cent stake to the majority shareholder in Airbus, the Franco-German aerospace giant EADS, comes despite the low £1.9bn valuation put on BAE's holding by the investment bank Rothschild. BAE had hoped the sale would raise twice that amount.

BAE said, having considered an audit of Airbus's prospects conducted by the accountants PricewaterhouseCoopers, it had concluded "a significant amount of management focus, time and investment will be required to address the issues currently facing Airbus to improve its operating and financial performance and thereby increase its value".

The company added there were inevitably risks in any such recovery programme and, had it decided to retain the shareholding, BAE might have had to wait an "extended period" before it could sell its stake at a materially higher price.

The sale will bring BAE net proceeds of £1.2bn. Of this, up to £500m will be handed to shareholders through a share buy-back. BAE may also use some of the money to top up its pension fund. The rest will be used to pay down debt and finance the purchase of other defence companies.

Airbus is facing major challenges to bring its A380 super-jumbo programme back under control after production delays which could cost EADS €2bn (£1.4bn) in lost profits. The new wide-bodied A350 jet which Airbus has decided to launch in competition to the Boeing 787 Dreamliner is forecast to cost €8bn to develop - twice the initial forecast. On top of this Airbus is faced with the longer-term cost of replacing the workhorse of its fleet, the narrow-bodied A320, and a dollar exchange rate which is increasing the break-even point on new aircraft programmes.

BAE's decision to quit Airbus will raise fears about the long-term security of the 14,000 UK jobs that depend on the programme. But the Government is working on an agreement with EADS that will give the UK a fixed workshare on Airbus, the right to nominate a director and guarantees on future research and development work.

BAE will now have to convene an extraordinary meeting of its shareholders to approve the Airbus sale, although this is seen as a formality. BAE said the board vote in favour of selling the stake had been unanimous.