Perhaps of less interest to us here in Britain, but does the agreed near $9 billion bid by French aerospace engineering group Safran for long troubled French aircraft seat and toilet manufacturer Zodiac Aerospace demonstrate, if nothing else, that in France protectionism remains alive and well? Well, you are entitled to think that even if there is, as usual, no actual proof that the hand of the French Government was anywhere to be found!
But if the last question was a difficult one to answer ask yourself whether a Safran takeover of Zodiac Aerospace is a marriage of convenience perhaps or is it maybe even a marriage of common sense born out of sensible, well thought through strategy that has shareholders interest at heart? Err, now that’s a very difficult one to put into writing but let’s just say that long experience tells me that, on this occasion, I will go for the former rather as opposed to the latter!
Let’s get the specifics of the agreed acquisition out of the way first. Zodiac claims to be a world leader in aerospace equipment and systems for commercial, regional and business aircraft as well as helicopters and space applications. What that means in reality is that it is one of the two largest global producers of aircraft seats, toilets plus a few other things in high volume.
Established over 120 years ago, Zodiac Aerospace operates from approximately 100 different locations worldwide and in total employs 35,000 people. This is a big business area and not only does it involve supplying to new aircraft manufacturers but to airlines when they refurbish and refit planes.
Zodiac Aerospace is though, a company that has had serious production and bottom line issues for several past years and little more than a year ago, management found themselves being publically humiliated by Airbus Group, one of its major customer, for ‘being in denial’ over the extent of production problems and seat delivery delays – particularly those in regard of Airbus’s newest aircraft development, the A350 XWB.
In a highly competitive market and one that with demand for Boeing and Airbus planes being extremely high, on top of rising production demands from both aircraft manufacturers, Zodiac Aerospace problems have surrounded pressures related to cost and the high level of competition in the seat industry. In particular, it suffered serious problems at an acquired US plant.
Zodiac is in fact one of two large global suppliers of aircraft seats and toilets, the other being B/E Aerospace in the US and which was recently acquired by Rockwell but others are growing up fast.
A potential merger between Safran and Zodiac Aerospace, both of whom are quoted on the Paris Bourse, has been on the cards for some considerable time. Indeed, the first approach from Safran was I believe as long ago as 2010, most likely then at the behest of the French government to ensure that Zodiac stayed in French hands.
Five years on when the next approaches from Safran for Zodiac Aerospace was made public and turned down the thought behind this was that with various families owning close to 40% of Zodiac Aerospace shares (23.8% of the stock and 36.6% of the voting rights) some none public shareholders were concerned that, given the extent of the share price fall over the preceding eighteen months, it would be much better to hang on to the shares in the hope of turning three years of problems and poor performance around first.
Zodiac Aerospace also brings with it an unattractively high level of debt and a balance sheet that, the last time I looked, was not exactly that inspiring or healthy. Nonetheless, I am sure that aircraft manufacturers to whom Zodiac Aerospace supplies and that have been forced to endure so many seat and toilet supply problems over the past three years will be delighted that ownership of the company is moving into new hands.
Not surprisingly, Zodiac shares jumped 23% in early morning trading in Paris today but what exactly are Safran buying? Yes, they are acquiring a large and important supplier of aircraft seats and toilets to be sure but also one that along with its main competitor B/E in the US, may be facing even stiffer competition in future. After all, entry costs into this particular area of aviation are not exactly that high and last years’ announcement by Boeing that it planned to buy seats for its 737 aircraft from ‘Lift by EnCore’, following various delays at the hands of the big two suppliers, set an interesting new market tone.
Safran, which is 14% owned by the French state, had been formed in 2005 through the very interesting arranged merger of aero engine manufacturer Snecma and security company SAGEM. At the time Sagem was best known as communications systems and mobile telephony business although it also produced a range of defence and consumer electronics products. Subsequently, in 2008, the merged company spun-off the communications and mobile telephony business and, I believe, elements of these businesses are today owned by Carlyle Group.
As France’s only aero engine producer Safran is of course hugely important in terms of being in the ‘national interest’ but its investors will be far more concerned to ensure that management do not take their eye off the ball in terms of the new generation of LEAP-1 engine, a high-bypass turbofan engine development now being produced by the CFM International, a partnership between GE Aviation and Safran Aircraft Engines. LEAP-1 engines by the way are fitted to the new generation of very high selling A320 neo aircraft while the LEAP-1B engine will also power the Boeing 737 MAX. With its hugely successful CFM56, Safran (Snecma) with its GE Aviation partner have long been the sole engine suppliers on the Boeing 737 family of aircraft.
Is it that important that France held on to manufacturing of aircraft seats and toilets? Better ask the French government but somehow I do not feel that sale to a non-French owned entity, not that I have heard the possibility of there being one, would have been that welcomed.
Although profitable through most of its long history, Snecma which today comprises the bulk and probably most important part of Safran, had long been state owned and controlled. Its eventual arranged sale or should we better call this merger, with Sagem to form Safran avoided a potentially high-risk alternative sell-off plan by the French government of Snecma to private investors at a potentially knocked down price. Snecma management, who for a period in the early 2000’s I knew well and worked with, wanted to stay independent, but while the French government wanted to reduce its stake it also wanted to ensure that Snecma would never be subject to a foreign takeover.
Following the merger with Sagem that formed Safran the former Snecma activities would comprise the majority of the merged business. There were to be subsequent rumours that because at that time the French government still owned 30% of Safran and 27% of Thales that an even larger merger with Thales might one day occur. Such rumours were soon dispelled and pleasingly without damaging political interference being very well run, Thales has gone from strength to strength ever since.
While the 2005 merger plan between Sagem and Snecma may have lacked industrial strategy and possibly, even commercial sense, it has just about worked. This was the sort of merger or acquisition that you just would rarely if ever have contemplated being announced in the UK unless of course, it was a recovery or basket case acquisition albeit one with assets to sell, situations that are beloved by private equity groups and modern day assets strippers. As if to back the lack of strategy point up, just imagine back in 2005 the reaction from the UK investment community had a successful quoted UK based service company announced a plan to acquire a large, high risk and potentially cyclical engineering company at a time when the economy didn’t exactly look rosy. I am sure that you get my point.
As in so many of the various industries that the French government reckons are in the national interest, today we see another example of a behind the scenes move by those in France to ensure that French companies will stay in French hands. If you don’t happen to believe in globalisation and free and open markets, you have to hand it to the French.
CHW (London – 19th January 2017)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785