Invesco, the largest shareholder in BAE, has voiced 'significant reservations' over its proposed merger with EADS and the impact it could have on shareholders.

Funds managed by Invesco own around 13.3% of defence firm BAE's ordinary shares, making it the largest shareholder in the company.

The investment firm said it "does not understand the strategic logic for the proposed combination" other than diversification, which it said investors could achieve for themselves more cheaply and simply.

It also said the merger would materially jeopardize BAE's "unique and privileged position in the United States defence market", and had been unable to identify any corresponding benefits to offset this.

Invesco also hit out at the terms of the deal, saying the envisioned 60:40 merger ratio did not reflect BAE's superior cash generation, or the quality of its earnings stream.

It is also "very concerned that shareholder dividends will not be prioritised in the combined group, with BAE shareholders then facing a significant drop in their dividend income in the future."

This intervention makes plans to create a European aerospace and defence giant look increasingly shaky.

It comes on top of significant governmental wrangling over the deal, which politicians are worried could affect national security.

UK Defence Secretary Philip Hammond told the BBC over the weekend that France and Germany must reduce their stakes in defence firm EADS if the UK is to allow a proposed merger with BAE Systems to go ahead.

He said the government was willing to use its 'golden share' in BAE, which allows it to block any change in control of the UK-listed company.

Meanwhile there are reports Germany has threatened to scupper the £28bn merger unless the headquarters of the combined company is located in Munich.

The firms have until October 10th to announce whether they will continue with the talks.

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