Wednesday, June 07, 2006

Sic Semper European Solidarity? BAE Set to Dump EADS

It was widely reported today that BAE, a 20 per cent shareholder in EADS the parent company of Airbus, is going to exercise a 'put' option and sell its share in EADS now that it and EADS could not reach a mutually agreeable price. BAE, to put it starkly, is getting out while the getting is good.

I know, I know, this is an aviation blog, but this is important.

A 'put' option is not something that happens on the golf course, but what it is is the right to compel a sale of something to someone. BAE and EADS not being able to reach a mutually agreeable price, neutral arbiters will be called in to settle the matter.

What are we to make of this? First of all, EADS stock has lost thirty per cent of its value in the last three months. That can't be good. Second, we can infer that the put option being exercised on the runup to Farnborough means that BAE does not think the news from there will be enough to set things straight, and that furthermore they don't care.

Although there are sound reasons related to BAE's defense business in the states that suggests that a realignment of interests would be better, the fact is that nobody decides to dump an asset of this size and quality unless they think things are going to get a lot worse and soon. You don't dump an asset that you think will increase substantially in value unless you need the money, and BAE doesn't.

Here at the home of the original S.W.A.G. (scientific wild assed guess), we think that there's a possibility that BAE knows what we know: that Airbus is in way over its head. Two of the projects that it is counting on to pave the streets of Toulouse with newly minted Euros (the A380 and the A350) are turning into white elephants that aren't selling while the cash drain of product development continues to take its toll.

And who knows what the future holds for the A400M? Details of progress is sketchy and it's not going to come on line in time to salvage the A350 and A380.

Stay tuned for some very interesting developments and ask yourself:what does BAE know that Jean and Hans Stockholder don't?

News flash! I'm informed by a colleague in the Land Down Under that the BAE stake in EADS is something in the form of an equity stake that isn't exactly pegged to the price of the shares...which maybe means that BAE is thanking their lucky stars right now they DIDN'T have shares.


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