BAE fighter jet
BAE and EADS merger hits shareholder turbulence (Photo: Reuters) Reuters

The proposed $45bn merger between BAE and EADS has stalled after BAE's largest shareholder Invesco Perpetual issued a lengthy list of objections.

Invesco revealed concerns over state interference, poor terms and a lack of strategic rationale that could, in turn, hurt the British defence company's long term company health, as the merger with EADS could have a negative impact on BAE's unique position in the US.

"Invesco believes BAE is a strong business with distinctive positions in the global defence market, especially in the U.S. and UK, and good stand-alone prospects. We look forward to discussions with the board of BAE and other BAE shareholders in the coming days," said one part of Invesco's statement.

Invesco's statement outlined its objections under eight categories, which also included how the level of state shareholding in the combined group would heavily impair its commercial prospects and that the structure of the deal did not reflect BAE's superior cash generation.

However, despite Invesco having a 13 percent stake in BAE, a total of 25 percent of shareholdings would be needed to block a deal.

In Europe, Nato officials aired their support for the merger, seeing the benefits as essential for Europe to maintain its defence capabilities, but 45 UK members of parliament have signed a letter to Prime Minister David Cameron urging him to veto the merger unless certain conditions are met.

The letter says that the deal would pose significant risks to BAE's business in the US as well as manufacturing and jobs in the UK, and is not in the country's national interest unless "vital safeguards are put in place".

Although BAE is a UK-listed company, it derives nearly half of its global revenue from its largest customer; the US military. The deals have also placed it among the biggest foreign companies in the US defence sector.

"Invesco has announced its concern with the deal, suggesting the company could achieve diversification without the merger that may jeopardise BAE's unique and privileged position in the US defence market," says an RBS research note.

"Invesco don't have a large enough share to block the deal, but it highlights yet another hurdle for the heavily politicised merger. It's looking increasingly likely that the 10th October deadline will need extension."

While Invesco's and politicians' objections may stall the merger, in order to complete the deal, it must be approved by the Committee on Foreign Investment in the US (CFIUS) - a process analysts predict will not be completed until 2013.

The CFIUS, which is headed by the US Treasury and the Pentagon, State Department and other government agencies, would have to assess the official proposal and air any concerns they may have.

Shares in BAE are trading 1.25 percent to the downside as of 0841 GMT at 324.00p. However, over a 3 month period, shares are up nearly 11 percent.

EADS shares are also trading in negative territory at 26.30, by just trading -0.70 percent.