BAE Exercising Its ‘Put Option’ Re: Airbus

In April 2006, DID covered and analyzed BAE Systems’ proposed sale of its 20% stake in Airbus. BAE now confirms that it has issued a Put Option Intention Notice to EADS, a process contemplated in the Airbus Shareholders Agreement signed in 2001. Wikipedia explains what a European Put Option is.

The Put Option process is now almost complete, and will leave BAE Systems with over EUR 1.5 billion in funds to be used for acquisitions et. al. Following management’s damning assessment of Airbus, and recent news re: the A380 that seemed to confirm those fears, BAE’s shareholders overwhelmingly approved the sale.

May 2/06: Option announced. BAE Systems may now exercise its put option, though it is not obliged to. Negotiations on BAE’s sale of its Airbus stake will now be governed by the guidelines within the Airbus Shareholders Agreement. See EADS release).

June 7/06: BAE Exercises its Put Option.

June 30/06: Rothschild Investment Bank sets the valuation of BAE’s 20% share at EUR 2.75 billion (USD $3.5 billion at current conversion), significantly less than the GBP 3.5-4.0 billion (EUR 5.0-5.75 billion) figures bandied about by analysts when BAE announced its sale, or even the reported EUR 3.5 billion valuation on EADS’ own books at the time. EADS has now offered to pay BAE that value in cash. The valuation comes shortly after a 26% plunge in EADS share price, however, along with allegations of executive misconduct followed by major turnover among its top executive ranks.

July 5/06: The BBC reports that BAE will seek an audit of Airbus to find out why the valuation was roughly half of what it expected. It has given two weeks’ notice, but the audit is not expected to finish before the end of August 2006. BAE’s Board will make recommendations following the audit results, but media reports note that a reversal of its intent to sell is possible.

Another BBC article adds: “There will be also be concern among [EADS] investors about precisely why Rothschilds offered such a low assessment of what the business is worth.” Given that Airbus and EADS are considered to be exemplars of the European/EU ‘business model,’ it will be interesting to see how realistic and candid that European discussion will be.

Sept 6/06: The Board of BAE Systems announces that it has completed the audit, and states its belief that BAE should sell in damning terms. After looking at the audit, the Board believes that:

“Airbus is facing a challenging short to medium-term outlook, in particular with respect to certain of its principal programmes… 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 to increase its value. Inevitably, there are risks involved in such a recovery programme and, having reviewed the Audit, the Board is concerned about the possible cash requirements of the Airbus business in the medium-term. The Board therefore believes that it is in the best interests of the Company to exit…”

Following repayment of debts outstanding between BAE Systems and Airbus at completion and the payment of transaction related costs, net proceeds to BAE Systems are estimated to be approximately EUR 1.78 billion (GBP 1.2 billion).

The Board proposes to return up to GBP 500 million to BAE shareholders via on-market purchases of shares, and also intends to consult with the trustees of the Company’s pension schemes and the Pensions Regulator with regard to any further investment in those schemes. This means that any of BAE’s rumoured acquisitions will have to come from the remainder, which is a much smaller amount than originally expected. Due to its size, the sale of its Airbus stake requires the approval of BAE Systems’ shareholders at an extraordinary general meeting before it can be finalized.

Oct 4/06: At the Extraordinary General Meeting, the shareholders of BAE Systems passed a resolution approving the disposal of BAE Systems’ entire interest in Airbus. “As a result, BAE Systems expects completion of the disposal to take place not later than 14 October 2006, in accordance with the Shareholders’ Agreement between BAE Systems, EADS and Airbus.” The voting on the resolution was 99.85% in favor, and is fully detailed in this BAE release [PDF format].

Meanwhile, EADS is announcing further delays of the A380 as it completes its program review (both releases on October 3, 2006), and its retructuring proposal to move Airbus operations out of Germany is generating political shocks.