LONDON The largest shareholder in BAE issued a long list of objections to the group's proposed $45 billion (27.9 billion pounds) merger with EADS on Monday, including concerns over state interference, poor terms and a lack of strategic rationale.
In a scathing and lengthy statement, Invesco Perpetual said the deal could also have a negative impact on the British firm's position in the United States, where it has unique access as a foreign firm to sensitive defence work.
"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," it said, adding that it had, on and off, owned shares in BAE for over 20 years.
"We look forward to discussions with the board of BAE and other BAE shareholders in the coming days."
The statement, which analysts described as a comprehensive demolition of the strategic logic behind the deal, comes two days ahead of a UK stock market-imposed deadline for the two companies to set out a more detailed blueprint for the merger.
It also follows the rising tensions that spilled out into the public last week, sparked by France, Britain and Germany jockeying over the role the state would take in what would be the world's largest aerospace and arms group.
British Defence Secretary Philip Hammond warned on Sunday that Britain would block the deal if key "red line" priorities were not met, including an ability to cap the influence the French and German governments would have on the new company.
"They own 13.3 percent and you need 25 percent to block it," Espirito Santo analyst Edward Stacey told Reuters. "This does not kill the deal - and it's not to say they could not change their minds if the merits are spelled out to them - but it's a blow."
Shares in BAE were down 1.3 percent, slightly underperforming the wider FTSE 100 Index which was down 0.9 percent. Shares in the European group EADS were down 0.5 percent.
Setting out its objections under eight categories, Invesco said the structure of the deal would hamper synergies while the ratio did not reflect BAE's superior cash generation.
It also felt the level of state shareholding in the combined group would heavily impair its commercial prospects.