Safran shareholder TCI warns against more mergers

Wed Oct 10, 2012 9:56am EDT

* TCI opposes further buys outside civil aerospace

* Opposes fresh bid for Zodiac Aerospace

* TCI says Safran should sell Ingenico stake

* Says stock undervalued

* Safran shares up 2.3 pct

By James Regan and Sinead Cruise

PARIS/LONDON, Oct 10 (Reuters) - Activist investor The Children's Investment Fund Management(TCI) has turned its attention to French aerospace group Safran, telling it to stop making "value destructive" acquisitions and return cash to shareholders instead.

The influential London-based hedge funds firm, known for its ability to rally other shareholders behind its campaigns to shake up a target company's management, said in a letter addressed to Safran's top executives that it wants it to halt any further acquisitions outside the civil aerospace sector.

Accusing the company led by Chief Executive Jean-Paul Herteman and deputy CEO in charge of finance Ross McInnes of making bad acquisitions because of a desire to be "bigger rather than better", TCI said more deals of this nature would be unacceptable, including any fresh attempt to take over French aircraft seats and cabin fittings maker Zodiac Aerospace .

Safran, which makes jet engines to airport security systems, declined to comment.

"If the company continues with its current acquisition policy we are prepared to use all options available to us to enforce strategic change," TCI partners Edgar Allen and Ben Walker said in the letter, a copy of which was obtained by Reuters.

"This includes voting against the reappointment of management and publicly encouraging other shareholders to do the same", they said.

The letter, which says TCI-managed funds speak for 3 percent of Safran, also warns against doing any "politically motivated" deal with state-controlled defence electronics group Thales , mindful of last year's failed attempt at a consolidation despite pressure from the government to reach agreement.

Echoing some critics of the abortive EADS merger with BAE Systems, the letter said: "The defence industry is in structural decline. Revenue growth will be limited and margins will continue to come under pressure as government spending around the world is impacted by austerity measures.

"There is a clear conflict of interest in doing any deal involving another company with state ownership and external shareholders will be extremely suspicious of any such deal."

Safran was created in 2005 from the state-backed merger of jet engines maker Snecma with electronics conglomerate Sagem, with the French government still holding a 30 percent stake.

"Safran has a history of making bad, value-destructive acquisitions and current management has publicly stated that it would like to do more deals in the future," Allen and Walker said.

"Such statements are distracting and counter-productive as they make overpaying more likely," they said.

TCI also said Safran should sell its 22.7 percent stake in payment technology group Ingenico, returning the cash to shareholders via a special dividend, and raise its dividend payout to 50 percent of profits thanks to its strong cash flow.

In July the company posted a 23 percent rise in first-half operating profit in July on a 14 percent increase in revenue.

But TCI said while Safran's aerospace propulsion division was well-managed with enormous potential to generate cash, its aircraft equipment business had consistently underperformed and despite leading market shares in landing gear and aircraft brakes, its margins were half those of its closest rivals.

While Safran shares should be trading at an unspecified high multiple, with an estimated intrinsic value of 55 euros a share, underperformance and acquisitions meant Safran was trading at "just" 12 times TCI's 2013 earnings per share estimate for the group.

The stock was 2.3 percent higher at just over 30 euros at 1334 GMT on Wednesday and is up nearly 30 percent so far this year.

TCI said Safran's recent acquisitions had performed very badly, calling security business takeovers like U.S. face-recognition software maker L-1 Identity Solutions, bought for $1 billion last year, "expensive and value destructive".

"These acquisitions have been done at multiples significantly higher than Safran's valuation and comparable industry deals," Allen and Walker said in the letter, adding: "Management's recent track record of investment in areas outside of civil aerospace is one of failure."

TCI, run by media-shy founder Chris Cooper-Hohn, has claimed a slew of high-profile executive scalps in nine years of campaigning, with its first big battle ending in the departure of Deutsche Boerse's then chairman and CEO following a row about its bid for the London Stock Exchange.

Earlier this year it agitated for change at Coal India , where it challenged the Indian government, the firm's largest shareholder, for putting pressure on the company to sell assets at below-market prices and exercising excessive control over strategy and growth plans.