BAE prepares to acquire US rival

BAE Systems’ investors are set to approve a proposal that will change the company’s borrowing rules and ignore the impacts of certain international accounting standards, to clear the way for an acquisition of US rival United Defence Industries.

Link: IFRS poses borrowing rethink for BAE Systems

Analysts claimed that shareholders will tomorrow vote in favour of stripping out IAS19, IAS32 and IAS39 when determining whether the company has exceeded the borrowing threshold prescribed in article 104 of its articles of association.

BAE called an emergency general meeting on the matter so that it could go ahead with raising capital for the acquisition of its US competitor UDI.

The finance plans for the UDI transaction would take BAE over the borrowing limit specified by article 104, unless shareholders agree to leave out the three new accounting standards.

BAE has set up a £1.5bn credit facility with Goldman Sachs and Dresdner Kleinwort Wasserstein, but under IFRS, its shareholders’ funds fall from £4.7bn to £3.1bn. This leaves the company’s balance sheet over-leveraged for the £2.1bn UDI bid.

Although the need to amend the articles of association is due to an accounting technicality, BAE will have to make the amendments to adjust to the new reporting regime.

One analyst told Accountancy Age that shareholders are likely to amend the articles of association, because they are not of a material nature and amount to nothing more than ‘sensible legal housekeeping’.

Andrew Gollan, of investment bank Numis, said the proposed amendment to article 104 was a routine change to adapt BAE’s borrowing rules to IFRS.

‘Changing your articles of association is not something you do everyday, but it has been forced upon BAE by the new reporting,’ Gollan said. ‘Nothing much has changed. BAE’s underlying value is the same. It is a matter of satisfying new requirements.’

BAE also emphasised that the amendment will be nothing more than a technical adjustment to the borrowing rules.

‘The effect of these new standards on BAE Systems’ balance sheet is of a technical accounting nature rather than one affecting the underlying economics of BAE Systems’ business or its ability to raise finance,’ the company said.

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