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Another Good Reason to Hold BAE Systems

By Tony Reading – May 21, 2013 at 5:11PM

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Sir Roger Carr is lined up as incoming chairman of BAE Systems.

LONDON -- According to weekend newspaper reports, Sir Roger Carr -- currently chairman of Centrica -- is being lined up as the next chairman of BAE Systems (LSE: BA) (BAES.Y 3.58%). If true, it will be another good reason to hold the high-yielding shares.

The current incumbent, Dick Olver, is expected to step down this year, with more than a little push from shareholders after BAE's plan to merger with Airbus manufacturer EADS fell apart. Fund manager Neil Woodford of Invesco Perpetual, BAE's largest shareholder with 13%, campaigned for Olver to go and is said to support Sir Roger's candidature.

What will this mean for BAE investors? I make three predictions.

Confidence and clarity
Sir Roger is an eminent City grandee, currently president of the Confederation of British Industry and deputy chairman of the Bank of England. He is outspoken, on topics such as U.K. energy policy, the U.K.'s role in Europe and executive pay, so BAE will have a louder and more confident public voice than recently. That should embolden management to take proactive measures to address the company's weak markets, too. Olver and CEO Ian King are damaged goods in the wake of the EADS debacle.

Don't be surprised if there's a good shake-up of the boardroom, too. Indeed, King may not be among those celebrating.

A big deal?
Sir Roger was chairman of iconic chocolate brand Cadbury when it succumbed to a controversial £11 billion bid from Kraft, and he was chairman of Thames Water when it was sold to RWE for £5 billion. With his extensive connections and openness to big deals at the right price, it's not inconceivable that the EADS merger could resurface.

That deal was vehemently opposed by Neil Woodford, but Invesco is also a shareholder in EADS and, with the right price and structure, attitudes could change. At least another time around, BAE shareholders could expect to receive proper value.

To buy, or not to buy
Woodford also savaged BAE's track record of over-paying for acquisitions, and called for the company to concentrate on shareholder value rather than growth.

It can be taken as read that Sir Roger will focus on shareholder value. But his reputation was built on M&A: in the 1980s and 1990s he worked for, and subsequently became CEO of, Williams Holdings as it grew from a car dealership to a FTSE 100 conglomerate. So his arrival might herald more acquisitions. With defense markets depressed, it's a cheap time to buy.

Sir Roger doesn't have an unblemished history. He resigned as chairman of Mitchells and Butlers after the pub operator lost £0.5 billion in property deals. But as an investor in Centrica, Neil Woodford knows him first hand and that's said to be the reason behind his support.

Woodford has an unrivalled record as a fund manager. His high-yield fund has grown at 12.6% a year since 1988, and is "the best performing of any fund investing in the U.K. since it launched" according to Hargreaves Lansdown. You can learn more about how Woodford selects stocks in this report from the Motley Fool: "Eight Shares Held By Britain's Super-Investor". You can download it by clicking here -- it's free.

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Motley Fool contributor Tony Reading owns shares in BAE and Centrica but no other shares mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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