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(TCI letters attached)

TCI attempts to block €8.5bn Safran takeover of Zodiac

Sir Chris Hohn’s activist fund says aerospace deal is overpriced with questionable synergies

One of Europe’s largest activist hedge funds has launched a campaign to block Safran’s €8.5bn takeover for its rival Zodiac, lambasting the deal to merge the two aerospace equipment companies as having “no strategic rationale”. 

In a move aimed at halting the deal, The Children’s Investment Fund, run by Sir Chris Hohn, has written to the French market regulator, the AMF, asking that Safran investors be given the chance to vote on the takeover before the aerospace group starts buying Zodiac shares. 

The move could pit TCI against the French government, which is Safran’s largest shareholder with a 14 per cent stake and harbours hopes of creating a national aerospace champion. TCI, which manages $14bn of assets, owns 4.1 per cent of Safran’s shares. 

At the forthcoming AGM, Safran shareholders will not be given a vote on the Zodiac deal. Sir Chris said that TCI would consider litigation against the Safran board “if they persist in avoiding a proper shareholder vote on the deal”. 

TCI has also written to Safran’s chairman to call on the company to drop the offer for Zodiac. 

Last month Safran, which produces jet engines, agreed to buy Zodiac, the maker of aircraft seats and cabin interiors, which has suffered from a series of crippling production problems. Zodiac has issued nine profit warnings over the past three years. 

TCI has built a reputation as an activist investor following a string of high-profile campaigns in Europe, Asia and the US. Last year it called for an overhaul of executive pay at Volkswagen in the wake of the diesel emissions scandal that rocked the German automaker. 

In a presentation arguing against the deal, TCI argues the company is “massively overpaying” for Zodiac for “questionable synergies”. 

Sir Chris said that Safran had “a terrible history” of executing and integrating takeovers. 

At the time of the deal announcement, Philippe Petitcolin, chief executive of Safran, said that while the profitability of Zodiac at the moment was “far from satisfactory”, the company was on the right track and improvement could be “accelerated” with their help. 

Safran declined to comment and the AMF said it had not received any letter. 

TCI has held shares in Safran since 2012, when it previously called on the company to stop making “value-destructive” acquisitions and specifically not to bid for Zodiac. 

TCI argues that the current structure of Safran’s offer for Zodiac could give preferential treatment to its family shareholders and allow them to derive tax benefits from accepting their payment in Safran stock that may not be available to other investors. 

In its presentation on Safran, TCI argues that Safran is “hugely undervalued” and that it would be worth €100 per share if it ditched its offer for Zodiac, compared to €64 today. Since Safran announced the deal for Zodiac, its shares have fallen by more than 4 per cent. 

TCI is proposing Safran instead uses the €2bn of cash generated from selling its security business to launch a share buyback. 

TCI’s other campaigns in Europe have included a battle to block Deutsche Börse’s takeover of the London Stock Exchange that resulted in the resignation of the German company’s chief executive, and forcing the Dutch lender ABN Amro to put itself up for sale. 

Some analysts say said there is a strong business case for the deal, giving Safran increased exposure to the booming civil aerospace sector. But others warned that the deal could distract Safran at a time when it is facing its biggest ever industrial challenge — increasing production of its new Leap jet engine that will be used on next generation versions of narrow-body aircraft made by Boeing and Airbus. 

John Armitage of Egerton Capital, which owns shares in Safran, said that there were not “many better businesses in Europe” but that it “did not become a better business by acquiring Zodiac”. Shareholders should have a vote on the deal before, rather than after, the tender, he added.