European Aeronautics, Defence & Space Co. (EAD) should sell its holding in Dassault Aviation SA (AM), maker of the Rafale combat jet, because the stake valued at about 4 billion euros ($5.3 billion) is a poor investment, the TCI fund said.
EADS’s 46 percent non-voting stake in Dassault Aviation may be valued at 5 billion euros in a sale, The Children’s Investment Fund Management LLP wrote in an Aug. 2 letter to Tom Enders, chief executive officer of the Toulouse-based company.
EADS has embarked on a major restructuring as it adopts Airbus as the name for the group and consolidates most of its defense and space operations amid shrinking military spending in Europe. Enders said last week that he wants to focus in future on “businesses that we fully control.”
“Defense budgets are likely to remain under pressure,” Ben Walker, partner at the London-based The Children’s Investment Fund Management also known as TCI, wrote in the letter, calling the Dassault Aviation stake “a poor use of EADS capital.”
TCI, which pushed for the breakup of Amsterdam-based ABN Amro Holding NV, said the stake sale should take place via a public placement rather than to the French government or Dassault Group to maximize the return EADS will receive. The fund said it holds more than 1 percent in EADS stock.
A Dec. 5 overhaul of the EADS shareholder pact grants the French government the right of first refusal for some or all of the holding. EADS acquired the Dassault Aviation stake at its formation in 2000 that combined European aerospace activities to more effectively compete with U.S. rivals including Boeing Co. (BA:US)
EADS declined as much as 23 cents, or 0.5 percent, to 44.83 euros in Paris, and traded at 44.92 euros as of 11:12 a.m. Dassault Aviation, which is thinly traded, dropped 0.3 percent to 920 euros.
TCI, which said EADS management is doing well and has the fund’s “full support,” wrote that proceeds from the sale of the Dassault stake should be used for a share repurchase or special dividend. The move could be a test for Enders, who has said he is trying to make EADS a “normal company” run outside government control, according to the fund’s letter.
Rafale vs Typhoon
The French government announced Aug. 2 it plans to buy only 26 Rafale jets in the next five-year budget plan starting 2014, as it banks on exports to sustain production of the combat aircraft at 11 planes per year.
Dassault, founded by Marcel Dassault in 1936, has managed to keep the company in family hands, with 50.1 percent of the stock controlled by Serge Dassault, the 87-year-old chairman and son of Marcel.
EADS is a partner with BAE Systems Plc (BA/) and Finmeccanica SpA (FNC) in the Eurofighter joint venture that makes the Typhoon combat jet, which competes for export orders with Rafale. The Dassault plane beat out the Typhoon last year for a potential order of more than 126 jets to India.
“TCI is a shareholder and we recognize that they have communicated their views,” EADS said in e-mailed comments today. “We are currently focused on executing the next stage of our strategy as communicated last week. Central to our strategy is efficient capital allocation and creation of shareholder value. We will keep shareholders fully appraised of our plans and progress.”
The fund, founded by Christopher Cooper-Hohn in 2003, has previously pushed for changes in management and strategy at companies including CSX Corp. (CSX:US) and Electric Power Development Co. (9513) of Japan. In October, TCI said Safran SA (SAF), France’s largest maker of commercial and military aircraft engines and equipment, should review its acquisitions policy and eschew deals outside of civil aerospace.
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