The proposed deal between BAE Systems (BA.LN) and European Aeronautic Defence & Space Co. (EAD.FR) has set off a wave of rating changes from leading equity analysts, who also point out that the creation of a new global aerospace defense giant could prompt a series of mergers in the industry.
BAE and EADS confirmed after the close of European markets Wednesday that they are in talks to create a combined company that would be the world's largest aerospace and defense firm.
Many analysts have highlighted big hurdles to the potential tie-up, describing the deal as ambitious and complicated. Even ratings firm Fitch stepped in to say that the potential merger could be positive but it faces "significant obstacles' and the original proposal may have to be watered down.
On Thursday, Citigroup downgraded EADS to neutral from buy, and Deutsche Bank lowered its rating on the company to hold from buy.
Citigroup focused on the 23% share price performance year to date and the risks associated with the potential merger of EADS with defense-focused BAE, plus the strengthening of the euro versus the dollar. The brokerage warned that "bigger" may not necessarily translate to "better." "Achieving merger synergies for the combined entity could be difficult, particularly given the need to ring-fence certain strategically sensitive activities. We believe that the merger also reflects a challenging outlook for U.S. defense budgets," it said.
Similarly, Deutsche Bank sees significant integration risks, seeing the benefits to BAE, which it rates at buy, more clearly than for EADS. "Cross-border deals...have shown themselves difficult to manage and we seriously doubt whether the political backdrop in Europe would allow anything like full synergy generation to be created from the transaction," said the brokerage.
Societe Generale, meanwhile, remains bullish on EADS, leaving it at buy, but has downgraded BAE to sell from hold, citing the stock's recent strong share price run. Shares have climbed 6.8% so far this month.
In addition, Societe Generale has downgraded Finmeccanica (FNC.MI) to sell from hold. It pointed out the strong recent run in the shares and the company's disposal program but noted Finmeccanica's weak cash generation and high debt. Societe Generale is not expecting a dividend from Finmeccanica this year.
And what of the sector as a whole? Could there be a shake-up now that this bold move has been announced? Some analysts certainly think so.
Sticking with Finmeccanica, Banca Akros said the Italian company could join forces with France's Thales (HO.FR) "an hypothesis which was considered in the past and then abandoned." It argues that the proposed BAE/EADS merger may put Finmeccanica under pressure to gain scale in field of defense electronics.
Exane BNP Paribas said both Thales and Finmeccanica could find themselves in a "strategic corner" in some defense market segments. Regarding Thales, Exane said that some might wonder if a deal with Dassault Aviation (AM.FR) would boost the stock. But it cautioned against a merger case with Safran (SAF.FR), warning that such a deal would be very difficult to implement and would create no value. Exane singled out U.K.-listed stock Cobham (COB.LN). It said Cobham could be a "credible" target. Exane rates Finmeccanica at underperform, Thales and Cobham at neutral.
Finally, Barclays said it will be investigating the impact of the deal on the sector. For now, it recommends taking profit in BAE and trimming exposure to EADS. It sees some hurdles ahead but said the deal could eventually create significant value for both companies. Barclays has an overweight rating for both stocks.
At 1050 GMT, BAE shares were down 6.3% at 341.70p and EADS was 8.5% lower at EUR25.63.
Write to Andrea Tryphonides at [email protected] or Twitter: @ATryphonides
BAE and EADS confirmed after the close of European markets Wednesday that they are in talks to create a combined company that would be the world's largest aerospace and defense firm.
Many analysts have highlighted big hurdles to the potential tie-up, describing the deal as ambitious and complicated. Even ratings firm Fitch stepped in to say that the potential merger could be positive but it faces "significant obstacles' and the original proposal may have to be watered down.
On Thursday, Citigroup downgraded EADS to neutral from buy, and Deutsche Bank lowered its rating on the company to hold from buy.
Citigroup focused on the 23% share price performance year to date and the risks associated with the potential merger of EADS with defense-focused BAE, plus the strengthening of the euro versus the dollar. The brokerage warned that "bigger" may not necessarily translate to "better." "Achieving merger synergies for the combined entity could be difficult, particularly given the need to ring-fence certain strategically sensitive activities. We believe that the merger also reflects a challenging outlook for U.S. defense budgets," it said.
Similarly, Deutsche Bank sees significant integration risks, seeing the benefits to BAE, which it rates at buy, more clearly than for EADS. "Cross-border deals...have shown themselves difficult to manage and we seriously doubt whether the political backdrop in Europe would allow anything like full synergy generation to be created from the transaction," said the brokerage.
Societe Generale, meanwhile, remains bullish on EADS, leaving it at buy, but has downgraded BAE to sell from hold, citing the stock's recent strong share price run. Shares have climbed 6.8% so far this month.
In addition, Societe Generale has downgraded Finmeccanica (FNC.MI) to sell from hold. It pointed out the strong recent run in the shares and the company's disposal program but noted Finmeccanica's weak cash generation and high debt. Societe Generale is not expecting a dividend from Finmeccanica this year.
And what of the sector as a whole? Could there be a shake-up now that this bold move has been announced? Some analysts certainly think so.
Sticking with Finmeccanica, Banca Akros said the Italian company could join forces with France's Thales (HO.FR) "an hypothesis which was considered in the past and then abandoned." It argues that the proposed BAE/EADS merger may put Finmeccanica under pressure to gain scale in field of defense electronics.
Exane BNP Paribas said both Thales and Finmeccanica could find themselves in a "strategic corner" in some defense market segments. Regarding Thales, Exane said that some might wonder if a deal with Dassault Aviation (AM.FR) would boost the stock. But it cautioned against a merger case with Safran (SAF.FR), warning that such a deal would be very difficult to implement and would create no value. Exane singled out U.K.-listed stock Cobham (COB.LN). It said Cobham could be a "credible" target. Exane rates Finmeccanica at underperform, Thales and Cobham at neutral.
Finally, Barclays said it will be investigating the impact of the deal on the sector. For now, it recommends taking profit in BAE and trimming exposure to EADS. It sees some hurdles ahead but said the deal could eventually create significant value for both companies. Barclays has an overweight rating for both stocks.
At 1050 GMT, BAE shares were down 6.3% at 341.70p and EADS was 8.5% lower at EUR25.63.
Write to Andrea Tryphonides at [email protected] or Twitter: @ATryphonides