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BAE Would Not Gain Much Value From U.S. Demerger, RBS Says

BAE Systems Plc, Europe’s largest defense company, would not gain much value from a demerger of its U.S. business in the medium-term, according to Sandy Morris, an analyst at Royal Bank of Scotland.

Maintaining a global reach will allow London-based BAE to be more successful in export markets, Morris said. While the U.S. unit may offer 870 million pounds ($1.4 billion), or 27 pence a share, in “hidden value,” BAE shares have suffered more than U.S. peers from worries about the U.S. defense budget and that valuation gap could now be narrowing, with major export contracts potentially lying ahead, he said.

“Upside of 27 pence is not to be sneezed at, but it is quite modest,” said Morris in an e-mailed note today. “We believe there are likely to be a number of major developments over the next quarter that may help to bolster BAE’s valuation.”

BAE should demerge its U.S. activities because measures to boost the share price, including buybacks and bolt-on acquisitions, have so far failed, Societe Generale analyst Zafar Khan said in a Sept. 19 note. Chief Executive Officer Ian King is coming under increasing internal pressure to make such a move as he carries out a strategic review, the Independent on Sunday reported yesterday, citing a person close to the company.

“We are far from convinced that a demerger of the U.S. business would crystallize significant incremental value for shareholders,” said Morris, who recommends buying the stock.

BAE has fallen 68 percent in London trading this year, valuing the business at 8.71 billion pounds.

To contact the reporter on this story: Sabine Pirone in London at spirone@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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