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28 Oct 04. The FT reported that the French government on Friday backed the creation of a new champion in the aerospace and defence sector as Snecma, the part-privatised aero-engine maker, and Sagem, the electronics group, announced plans to merge in a deal valuing Snecma at about €4.89bn ($6.23bn).

The move is a snub both for General Electric, the US conglomerate, and Thales, the French defence group, which had been grooming themselves as potential suitors for Snecma.

But Nicolas Sarkozy, in one of his final acts as finance minister before stepping down next month, has given the go-ahead to Sagem, which has launched an all-share offer with a partial cash alternative.

The two companies said the deal would involve an exchange offer of 13 Snecma shares for 3 Sagem shares. The cash alternative will be for €20 per Snecma share, having a total ceiling of €1.25bn, a 24 per cent premium to the group’s closing share price on Thursday.

In morning trade on Friday, Sagem’s shares fell 12 per cent to €69.15, while Snecma’s shares rose 4.2 per cent to €16.77. Although Sagem is smaller than Snecma, at a market value on Thursday night of €2.8bn against Snecma’s €4.5bn, the management will be divided between the two.

It will also allow the government to raise badly needed funds to
reduce its swollen budget deficit by selling part of its stake in the new company. The state is expected to raise between €700m and €1bn, and will have about 35 per cent of the enlarged group. The deal will create a group with sales of about €10bn. Insiders said there were two strong arguments for putting the companies together. First, it would create a world-leading group in complementary technologies: Snecma, as a leading aero-engine manufacturer and Sagem in communication networks and aeronautic systems. Second, the combined company would be less cyclical and reduce Snecma’s dependence on the dollar. Given the state’s stake in Snecma, insiders said it was unlikely the deal – expected to be completed next year – could be thrown off-course by a rival bid. GE has repeatedly expressed its interest in acquiring a minority stake in Snecma to reinforce its close industrial partnership in civil aero-engines with the French group. It was disappointed not to have been granted a 10 per cent stake when Snecma was partly privatised in June.

Thales made an offer to merge with Snecma before its privatisation.But this was shot down by Jean-Paul Bechat, Snecma’s chief executive, who said a deal with Thales would be “neither useful nor necessary for us”. The offer from Thales, 30 per cent owned by the state, was seen as a defensive move in response to continuing interest from the European Aeronautic Defence and Space Company.

Snecma shares have had an unspectacular performance since they were priced at the bottom of an indicative range of €15.45 to €17.20.

On Thursday they closed up 1.5 per cent at €16.01, valuing the group at €4.35bn. Lazards and CIC are advising Sagem, HSBC is advising the French government and Rothschild is acting for Snecma.

Comment: This is a bold move by the French government given the huge costs of developing new aero engines. Will GE walk away from any new developments and just build on the very successful CFM-56 engine? There is hardly any synergies between the two companies and very different cultures. The failure of Thales to win this bid may also accelerate the much-discussed deal between Thales and EADS which will reinforce the latters flagging electronics operations.

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