US managers keen for BAE's chief to separate them from UK parent
Pressure is mounting from within BAE Systems for chief executive Ian King to consider breaking up the company as part of the defence giant's latest strategic review.
An analyst note published on 20 September that called for the US arm to be sold off or demerged is understood to have been informally passed around a conference of 60 senior BAE managers in Boston a few days later. US managers are said to have been enthusiastic over the move, though other international executives were largely opposed.
The Société Générale note said that separating BAE Inc, the US arm, from a rebranded BAE Int would mean the entities would be worth approaching £13bn in total, equivalent to 380p a share. As a single entity, BAE is currently trading at less than 270p, a value of around £9bn. Sales from the US in 2010 were £9.6bn compared with £11.1bn from BAE Int.
A source close to BAE said: "The note was circulated and was the topic of conversation in the bar. The US guys were keen to go it alone."
BAE is one of a number of defence and aerospace companies that have been badly hit by spending cuts on both sides of the Atlantic. Last week, BAE confirmed reports that it was to cut nearly 3,000 jobs in the UK.
The common logic has been that the UK-based giant would want to retain operations in the US as it is the world's biggest defence market and the two countries account for around 70 per cent of sales. However, there is a growing view that there are few real operational benefits in having US and UK businesses combined as there is little in the way of cost savings through shared services and functions.
For example, a source close to Boeing boss Jim McNerney said that, despite years of speculation to the contrary, he thinks it would be "insane" to buy BAE. He would, though, be interested in the US arm should it ever become available.
Many shareholders are known to want BAE to assess the potential benefits of a break-up, in which they would get shares in both entities. As well as SocGen's forecast that the prices of the two new stocks would increase immediately, the US arm would become a takeover target and likely be sold at a strong premium to its share price.
Importantly, historic concerns that a separation would result in at least one of the new companies losing investment grade status in their credit ratings were dismissed by SocGen. This, plus pension fund issues, are seen as stumbling blocks to a demerger.
The idea is known to appeal to investors who are unhappy that the share price has fallen by nearly a third in 18 months. Several are understood to have indicated that they would like Mr King to pursue a more radical strategy than the current share buy-back and increased dividend programme.
One BAE investor said: "I think [Mr King] is under pressure to come up with something. The extreme view is that BAE has become little more than a venture capitalist buying businesses and destroying value."
Mr King is embarking on BAE's annual strategic review, which will be completed by the end of the year. Sources suggested that he had recently sent the SocGen note to 250 senior managers for comment, though the company "categorically" denied such a formal move had taken place.
A BAE spokesman said: "We meet regularly with our shareholders to ensure our strategy is aligned with their interests."
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