UPDATE 2-Ousted Thales CEO defends record as Levy takes charge
* Vigneron lost support of French state and Dassault
* Thales confirms ex-Vivendi head Levy as new CEO
* Levy seen maintaining or expanding cost-cut drive
* Thales shares dip another 1 percent (Adds Vigneron letter, analyst quotes, details)
By Cyril Altmeyer
PARIS, Dec 20 (Reuters) - The ousted head of Thales defended his record in turning round Europe's largest defence electronics firm as his freshly appointed successor prepared to tackle internal disputes and further narrow a profitability gap with rivals.
Luc Vigneron's troubled three-year reign ended on Thursday, when he resigned at a board meeting, "having acknowledged the absence of support of the group's two main shareholders," the French state and Dassault Aviation, Thales said.
Vigneron's tenure had been marked by criticism of his style of leadership and by a war of attrition with unions, something his successor Jean-Bernard Levy, the former head of media firm Vivendi, will need to address quickly, analysts said.
Shares in Thales slipped 1 percent after falling 2 percent on Wednesday, when word of the shake-up emerged, reflecting Vigneron's steadily improved relations with investors as he implemented cost cuts while trying to quell a revolt inside the company.
"The profound transformation which we have together carried out at Thales since 2009 has begun to bear fruit," Vigneron told staff in a farewell letter reproduced in Friday's first edition of French newspaper Les Echos.
Thales confirmed the appointment of Levy, 57, who resigned in June as chief executive of Vivendi over a strategy dispute with the company's supervisory board.
Dassault Aviation Chief Executive Charles Edelstenne said on Wednesday Levy's first task would be to restore calm at Thales after a period of instability at the radar and avionics maker .
Analysts said Levy would also maintain and could speed up efforts to improve Thales operating margins, building on the existing "Probasis" proposals to save 1.3 billion by 2014.
Thales targets a slight improvement in its operating margin to 6 percent in 2012 from 5.7 percent in 2011. Despite jumping from 1.2 percent in 2009 when Vigneron was appointed, they remain well behind double-digit margins elsewhere in defence.
"The margins have been expected to come up for the last 10 years and they remain the lowest margins in our sector, both compared to other European defence companies and to US defence companies," said RBC Capital analyst Rob Stallard.
"While they have improved, they still have a long way to go to get to parity with other stocks of similar business base. We think the main impediment is the structural disadvantage of French government constraints on the labour base."
Seen as precise and sometimes austere, Levy graduated from France's top engineering school with a bias towards telecoms, but developed and maintained connections in defence after working for the space affiliate of missile maker Matra.
Speaking on the eve of Vigneron's departure, Edelstenne urged reporters to ignore speculation of a grand French merger that might combine Thales with aerospace groups Safran and Zodiac Aerospace any time soon.
However analysts noted that Levy's well-publicized string of deals at Vivendi, a company seen as perpetually re-inventing itself, sent a clear signal Thales would be battle-ready for any future debate over France's fragmented defence sector.
A failed merger earlier this year between European aerospace giants EADS and BAE Systems highlighted the scale of smaller European companies, which may come under pressure to bulk up to face growing competition from Asia.
The French government plans a White Paper on defence spending in January followed by a stringent five-year budget before the summer of 2013. Once these are completed, some analysts believe consolidation could return to the agenda.
"We thought there would be some movement after 2014 in the light of falling budgets everywhere, but now I think you could start to see something in 2013," said Oddo Scecurities analyst Yan Derocles.
Any defence consolidation will be politically complex.
The French government owns 27 percent of Thales, 30 percent of Safran, 64 percent of naval shipyard DCNS and 100 percent of battle tank make Nexter. The Italian government controls Finmeccanica which is undergoing painful restructuring but which many see as another future potential Thales partner.
"As we saw with EADS and BAE, there are still significant political impediments to European defence consolidation," Stallard said in a note.