BAE Systems board divided over plan for Airbus stake

The board of BAE Systems is understood to be furious at the prospect of being bounced into agreeing an unacceptably low price for its Airbus stake based on the valuation arrived at by the investment bank Rothschilds.

BAE executives have been left stunned by Rothschilds' calculation that its 20 per cent stake is worth only £1.9bn. That is at least £1bn less than BAE hoped to receive and some £500m less than the "conservative" valuation put on Airbus in the accounts of the majority shareholder, the Franco-German aerospace and defence company EADS.

The BAE board is expected to meet next week to decide what recommendation to make to the extraordinary shareholder meeting that needs to be convened to vote on the Airbus disposal. It can recommend that shareholders reject the Rothschilds valuation, accept it, make no recommendation at all or seek to find another buyer for the stake.

At least two BAE directors are understood to be ready to vote against acceptance, arguing that the valuation is "shockingly low" and unacceptable. But other senior sources within the company believe BAE will ultimately be forced to accept the valuation, albeit reluctantly.

Andrew Gollan, an analyst with Numis Securities, said: "We think there is still a real possibility that the shareholders could reject the proposal, even if recommended, which would clearly be a disappointment for the group's strategic focus on defence."

David Cumming, head of UK equities, Standard Life Investments, said he believed the sale will proceed, despite the valuation dip. "They have got the option of deciding not to sell... but I think they're pretty keen to sell. I think they will probably go ahead but when you are selling something for this sort of price, it is probably worth giving it some thought," Mr Cumming said.

Standard Life owns about 3 per cent of BAE's shares, which fell 3.25 per cent yesterday to 357.75p as the market reacted to the low valuation put on its Airbus holding. However, shares in EADS, which owns the remaining 80 per cent, did not move. EADS shares closed at €22.28, even though BAE's advisers calculate it should be nearer to €15 to reflect the low valuation on Airbus.

EADS said BAE's calculations took no account of the €6bn of cash in its balance sheet and its other assets, which include Eurocopter, the world's biggest manufacturer of helicopters, and MBDA, a missile joint venture in which BAE itself is a shareholder.

Rothschilds' valuation has put BAE in a difficult position. If it decides not to sell it will be left with an asset which it regards as non-core and which could decline further in value if the dollar continues to weaken and costs escalate on the Airbus A350 and A380 programmes.

The valuation is not understood to include any premium for full management control that EADS will assume by taking over 100 per cent ownership. Rather it was based on the outlook for the Airbus range of jets and wider external factors.