EADS @ Eu 28, -Eu 1.67 (-5.63%).
Right OK, in my first post on this subject (BAE takes off on proposed merger with EADS!) I broke off by saying I needed to look at the charts as well as reviewing what information is currently available.
So here goes.
EADS 2 day chart (Digitallook):
BAE Systems 2 day chart (Digitallook)
So EADS actually fell today but BAE "surged".
As to the clues. Well at this stage we are told that the venture will be 60:40 in EADS favour.
And currently, with EADS at 28 Euros a share, and 826.93m shares in issue, the company has a market capitalisation of around Eu 23,154m.
An exchange rate of £1: Eu1.2494 converts that to £18,532m.
Whereas BAE, at 363.6p and 3249.31m shares in issues, has a capitalisation of £11,814.49m.
And although its still very early days yet (since the public announcement anyway), combining the 2 companies at these values, assuming no other premium or cost savings, results in a market capitalisation of £30,346.49m.
We're also told that the venture will be 60:40 in EADS favour so, at the current closing values, we can see that BAE's 363.6p puts it somewhere in the region of 38.93% of the combined group's capitalisation (£11,814.94m / £30,346.49m).
So now I can at least see the reasoning behind BAE's surge today to achieve that 60:40 parity, which makes it an unrewarding exercise for anyone looking to buy into the venture ahead of the merger without first getting an idea of any premium that could be attached from planned efficiencies, patents, or combination of technologies.
But, for myself as an existing shareholder the post merger value now looks to have been immediately priced in, excepting any change in exchange rates or movement in either of the 2 companies share prices.
What I really need then, is for EADS share price to stay as it is, or, better still, appreciate, in order for BAE's share price to then also appreciate back towards the 40% proposed proportion of the new venture.
Worryingly, EADS share price moved down today though.
Similarly, and perhaps more likely in the current climate following Mario Draghi's plan to put a floor under European state borrowing costs (Super Mario powers up the markets with bond purchase program!), if the Euro were to strengthen then that would also increase EADS value and, presumably, also pull up BAE's share price to restore the 40:60.
Of course things could also go the other way. EADS might depreciate and/or sterling might strengthen!
So in summary and considering a possible exit strategy, at 363.6p, BAE already looks fully valued on the 60:40 proposal and is therefore dependent upon a premium revealing itself, or an appreciation in EADS capitalisation (either through perceived value or via the Euro).
Disappointingly, this assumption of a "full" valuation is only in context of the proposed 60:40 and not BAE's individual prospects given its current lowly 9 times forecast pe and ranking as the world's 3rd largest military contractor (on 2011 revenues).
To be honest at this point, it really feels they are selling out cheaply to EADS.
I also question EADS motives given the company's recent inability to negotiate a place on the top US Aerospace Industry lobbying group due to the group's restrictions on company's with government ownership.
EADS argument being that it "should be allowed to take a seat alongside flagship UK firms Rolls-Royce RR.L and BAE Systems".(http://trading.selftrade.co.uk: UPDATE 1-Airbus fights exclusion from U.S. aerospace lobby).
Given that this announcement only came on the 5th September it can only be co-incidental and not a reason in itself for EADS to seek a merger.
Will it subsequently lead to BAE's exclusion I wonder?
Really not too happy about the prospect at this stage though.
Related articles:
- http://www.sharecast.com: BAE surges on possible tie-up with EADS
- http://otp.investis.com: Stmnt re Share Price Movement
- http://en.wikipedia.org: EADS
- http://trading.selftrade.co.uk: UPDATE 1-Airbus fights exclusion from U.S. aerospace lobby
Related posts:
- BAE takes off on proposed merger with EADS!
- Super Mario powers up the markets with bond purchase program!
- August 2012: Portfolio update.
- BAE: 2011 Preliminary Results.
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