May 12, 2017 / 10:00 AM / 2 years ago

TCI calls on Safran to drop Zodiac deal and fix engines

LONDON/PARIS (Reuters) - Activist investor TCI Fund Management has called on the board of French aerospace firm Safran (SAF.PA) to cancel a takeover of Zodiac Aerospace ZODC.PA immediately and instead focus on fixing design problems with a new engine.

A worker on a Safran production line assembles a LEAP-1A aircraft engine co-developed with General Electric for Airbus in Villaroche, France, May 11, 2017, a day after Boeing suspeded test flights of its 737 MAX jetliner due to turbine problems with the sister LEAP-1B model. REUTERS/Tim Hepher

The move is the latest attempt by TCI to stop Safran’s $9 billion deal with struggling Zodiac, which the British hedge fund considered too expensive even before the latest profit warning from the maker of aircraft seats.

In a letter to the Safran board dated May 12, TCI said instead of pursuing the takeover, which would take up a lot of management time and focus, it should instead look to fix a problem with its new LEAP engine.

Boeing suspended some flights this week due to a problem with the design of Safran’s LEAP-1B engine, which powers its 737 MAX jets.

“Due to the extreme pressure that Safran is under to ramp up production of the LEAP engine, the board should immediately cancel the agreement to buy Zodiac Aerospace,” TCI founder Christopher Hohn wrote in the letter.

“Safran management currently has no capacity to integrate Zodiac or to execute the complex restructuring that will be required. At this critical time the company should be focused solely on the ramp up of the LEAP.”

A spokeswoman for Safran declined to comment.

Boeing says it has identified a problem with some of the low pressure turbine discs in the LEAP engine, which is made by a CFM International, a joint venture between General Electric Co (GE.N) and Safran.

Safran, though, said on Thursday there was no design fault and that checks would be completed in a few weeks.

It said production of the engines would not be affected because a second supplier for the same part was boosting its supplies. CFM aims to deliver “as close as possible to 500” in total for Boeing, Airbus (AIR.PA) and China’s COMAC.

Safran recently reported forecast-beating first-quarter revenue and reaffirmed its 2017 outlook, which includes plans to boost production of the LEAP engine to 2,000 units a year during the next three years.

While Hohn said he backed Safran as it was structured now, trying to hit that target while also fixing problems at Zodiac would be a “considerable and unnecessary distraction”.

“It would consume management time and demand a reallocation of talented Safran employees to run Zodiac’s troubled business. This would significantly increase the risk of the LEAP program developing expensive and damaging problems.”

Additional reporting by Tim Hepher; editing by David Clarke

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