BAE Plans $1.52 Billion Buyback as Profit Beats Views

BAE Systems Plc, Europe’s largest arms maker, said it will buy back shares worth as much as 1 billion pounds ($1.5 billion) over three years after demand outside the U.S. and the U.K. helped swell its cash reserves.

BAE gained as much as 6.2 percent, the most since Sept. 12, the day that merger plans were announced with European Aeronautic, Defence & Space Co. BAE said it’s left those plans behind, and the company will embark on its buyback program today, underpinned by net cash of 387 million pounds. Earnings before interest, tax and amortization fell 6.4 percent to 1.89 billion pounds last year, beating analysts’ estimates.

“There are a lot of green shoots in this organization,” Chief Executive Officer Ian King told reporters. “That gives us the confidence to do a share buy back.”

The share repurchase comes four months after the collapse of a planned merger with EADS, which would have helped broaden BAE’s business into civil aviation. The deal failed on German government opposition. Some BAE investors had opposed the tie-up at the time and pushed for a share buyback instead.

King said talks with EADS would “absolutely not” be revived. “You have to move on,” he said, adding that exploring the tie-up was the right move at the time.

Moving On

“This was a very good set of results,” said Nick Cunningham, a London-based analyst at Agency Partners. “The cash flow benefited from timing on prepayments, but a bird in the hand beats one that is due to come in a year or so.”

BAE expects “modest growth” in underlying earnings per share in 2013, excluding the impact of the share buyback. Profit could be affected by a possible 1 billion-pound hit on sales from U.S. budget cuts due to take effect on March 1 under so-called “sequestration” legislation, King said.

Earnings could improve by another 3 pence a share if talks with Saudi Arabia about the pricing of an existing deal for Eurofighter Typhoon warplanes are concluded, the company said. Negotiations are making “good progress,” King said, without saying when they may be completed.

“Timing is not driving us to make a decision,” he said. Fighter deliveries to Saudi Arabia are set to resume in May after a pause, providing impetus to get the deal done.

Full-year sales fell 7.2 percent to 17.8 billion pounds, reflecting lower Western defense spending. The value of the order book increased 8.4 percent to 42.4 billion pounds largely on the strength of 11.2 billion pounds in deals signed with customers other than BAE’ main markets, the U.S. and U.K. The backlog should grow further this year, King said.

Job Cuts

The company has been cutting jobs as it seeks to maintain profitability in the face of lower government spending. BAE said yesterday the U.S. business risks more than 3,500 layoffs as Pentagon curtails ship repairs.

“We will continue to pursue cost reductions and efficiencies with vigor,” King said, with additional restructuring possible in land system activities.

Discussions also continue with the U.K. government over the possible closure of one of three British naval shipyards. The company is trying to bring capacity in line with reduced demand after the biggest building spree since World War II, King said.

BAE has begun the process to seek a new chairman to succeed Dick Olver, who is due to retire in May 2014, King said. Invesco Ltd., which holds a 13.4 percent stake on BAE, called on Olver to quit over the EADS merger, a combination the investor opposed. Nick Rose was named as independent director in November to lead the search for a new chairman.

The company said it’s continuing to seek bolt-on acquisitions that provide rapid access to relevant technologies and capabilities, or “enhance routes to market.”

The stock has advanced 3.6 percent this year, valuing the company at 11.3 billion pounds.

Before it's here, it's on the Bloomberg Terminal.