PARIS France's Safran (SAF.PA) on Thursday rejected criticism by a UK hedge fund over a proposed $9 billion offer for Zodiac Aerospace (ZODC.PA) and pledged to stand firm as a spat intensified over plans to create the world's third-largest aerospace supplier.
Defending its agreed bid to buy family-controlled Zodiac despite recent industrial problems there, the French engine maker sent a six-page rebuttal to TCI Fund Management, accusing it of waging a public campaign to undermine the project.
TCI has questioned the strategic benefits of the deal and accused Safran of paying a "hugely inflated price" for Zodiac, which has issued a series of profit warnings following a production crisis in its aircraft interiors business.
It also objects to aspects of the deal's complex structure, which calls for a cash offer followed by a merger to bring on board Zodiac's core group of family shareholders.
TCI believes shareholders should be able to vote on the merger plan before the cash bid for at least 50 percent of Zodiac goes ahead.
In an open letter to TCI, Safran defended its strategy of diversifying from its core aero engines business to gain access to Zodiac's profitable aircraft equipment activities.
"The board is not for turning," Safran Chairman Ross McInnes told Reuters on Thursday when asked whether the company would modify the terms or structure of its proposal to acquire Zodiac.
Chief Executive Philippe Petitcolin said Safran was confident of lifting Zodiac's operating margin to its historic levels of at least 14 percent.
"Even excluding the dollar effect, we should be able to restore them to the level of profitability they had before the (seats production) crisis within two-three years," he told Reuters.
But TCI, which owns about 4 percent of Safran and is also a shareholder of Zodiac, poured cold water on that objective, saying Safran had no proof it could be met because it had been unable to get into Zodiac's factories to perform due diligence.
Without greater industrial certainty, it added it could not justify the way the deal had been valued.
"Wrong deal, wrong price - the stats are not correct," TCI partner Jonathan Amouyal told Reuters.
The fund, which recently clashed with German carmaker Volkswagen (VOWG_p.DE), earlier this month sent an open letter to French market regulator AMF, saying Safran's offer also risked violating shareholders' rights.
TCI later said it had support from several American and European funds.
Under the deal, Safran aims first to convince ordinary investors, which hold 68 percent of Zodiac, to sell their shares in the company for cash.
If Safran crosses the 50 percent threshold, the deal will proceed to the second phase: a merger between Safran and Zodiac.
This would offer core family shareholders in Zodiac a chance to accept Safran shares without giving up long-term tax breaks, which are seen as key to getting them on board.
Safran shareholders would also get a special 5.5 euro-per-share dividend before the merger.
According to TCI, launching the cash bid before allowing shareholders to vote on the subsequent merger would violate the rights of shareholders in both companies.
Safran said the request for a prior vote had no basis under French law or sound governance.
"You don’t proceed by permanent referenda," Safran's McInnes told Reuters.
TCI's Amouyal conceded the legal point, but said Safran should offer shareholders an earlier vote for "moral" reasons.
Safran is expected to face further questions on the plans when it issues full-year results on Friday. TCI has also criticized the amount of Zodiac debt to be taken on, but McInnes told the fund this would be absorbed through planned synergies.
(Additional reporting by Maiya Keidan; editing by Mark Potter, G Crosse)