* 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 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
"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
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
"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
"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
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
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.