Broker snap: Investec tells BAE investors to 'cash in'

13th Sep 2012 09:55

Investec has downgraded its rating for defence giant BAE Systems from 'hold' to 'sell' after yesterday's revelation that the group is in discussions with EADS about a possible merger. Shares jumped yesterday on the news to the 363p mark by the close, which Investec says nearly reflects the shareholder structure under the proposed deal terms (EADS:BAE - 60:40) - "the market has been very efficient", the broker said.However, the broker said that said that even accounting for eventual cost synergies, bid related upside is "limited given the deal complexities and political risks associated with this combination".While Investec said that competition/approval issues aren't "insurmountable", the combination will be complex with approvals needed from many global governments. Ownership agreement with several countries will prove to be highly sensitive political issues, analysts said.The broker has raised its target price from 290p to 350p, 4% below the yesterday's share price. "This is not quite the 'over 10%' downside we require to drive a 'sell' recommendation. However, we chose in this case to take a negative stance given the likely protracted timeframe to completion and general political and execution risks associated with such a large deal. Investors not prepared to wait for the long-term synergies should cash in."Investec notes that the enlarged group will have a €40bn market capitalisation with combined revenues of over €80bn and net cash of €12.5bn.Shares pulled back on Thursday, trading down 5.55% at 343.42p by 09:54, weighed down further by additional ratings downgrades by Societe Generale and Oriel Securities.BC