Ending Dassault's Airbus Connection Opens New Doors

Of all the legacies of 1970s French industrial policy, few are more peculiar than the fact that Airbus owns a short half of the maker of Falcon business jets and Rafale fighters – Dassault Aviation. But now, the three parties to that arrangement, including the French government, have begun to pick it apart. As a blend of politics and business, the affair is, not surprisingly, opaque – so while the implications are far from clear, it is fair to imagine that French aero-industrialists have their sensors finely attuned to the matter.

What we know is that Airbus, which has long held 46.32% of Dassault Aviation, has sold 8% of the company back to Dassault for €794 million ($979 million). Dassault, for its part, will cancel that 8%, plus another 1% of treasury shares, with a net result that Airbus will be left holding 42.11%. Airbus will attempt to sell a further 10%, market conditions permitting, by 30 June 2015, and Dassault will buy up to 5%.

Meanwhile, the French government in the latest transaction – for €980/share, realised late on Friday 28 November – agreed to waive its right of first offer. Paris is, however, maintaining a clear right to stop any transfer of shares that would see Groupe Dassault’s stake fall below 40%. Paris’s intentions may be opaque – or simply may be undefined – but an on-going desire to maintain a strategic influence over key French industries can probably be assumed.

The Airbus stake, after all, is a legacy of Francois Mitterrand-era French government attempts to nationalise Dassault. At the time, founder Marcel Dassault refused to sell, and a compromise was reached that saw the government and government-owned Aérospatiale, a predecessor company of Airbus, purchase minority stakes which eventually dropped onto Airbus’s balance sheet.

But while this transfer of a few shares could be the beginning of a slow unwinding of Airbus’s position in Dassault Aviation, there is no risk that parent company Groupe Dassault – whose other main business is Dassault Systemes, the software house behind the widely used CATIA design suite and a raft of cutting-edge virtual reality applications – will lose control of its aviation arm. Before the latest transaction, Groupe Dassault owned 50.55% of Dassault Aviation. After the purchase and treasury shares cancellation, it will hold 50.95%.

What, then, is changing? For Airbus, the answer would seem to be “very little”. The deal looks to be excellent value for Airbus, which has periodically faced calls to rid itself of what amounts to an idle investment that paid it a profit share of less than €295 million for 2013. In August 2013, Airbus Group shareholder The Children’s Investment (TCI) fund urged chief executive Tom Enders to sell off the Dassault stake, which it estimated to be worth about €4 billion. That figure would value the whole of Dassault Aviation at €8.6 billion, but the latest deal price would translate into a whole-company value of more than €9.9 billion.

The latest deal, combined with the planned share cancellation, leaves more or less unchanged a heavy 3% of Dassault Aviation shares on the open market. Such limited trading volume gives at best a weak signal as to the value of a company which earned €487 million in 2013 on sales of €4.59 billion. To value the company at around €9 billion is a generous 18 times earnings but, ultimately, question marks hang over any valuation.

To properly value Dassault Aviation, consider that more than half of its orderbook is in business jets, where Falcon is a strong player but in an arguably over-supplied market. The rest is in a shrinking defence market where Dassault’s only large customer is budget-strained France. That situation could change if seemingly interminable negotiations over a deal to sell 124 Rafales to India are concluded. But that deal, for 124 aircraft and the first export order for Rafales, was reached in principle in 2012 and no final resolution is in sight.

Sandy Morris, an equities analyst with Jefferies investment bank, says a conclusion to the India deal could open the door to further export sales of the Rafale, whose only operators today are the French air force and navy – and which inevitably competes for sales with the Airbus-championed Eurofighter. But, he stresses, the real significance is that India “underpins” the Rafale programme.

The other big issue in attempting to value Dassault revolves around what Morris calls “the scale of its ambition”. To have Airbus as a large shareholder may not matter much if Dassault carries on as it is. But to attract investors and exploit potential opportunities – for example, to lead a future pan-European unmanned air system development project, with partners that would necessarily include Airbus – would be far easier without messy cross-shareholdings.

To that end, notes Morris, Dassault could fund about half of the cost of buying out Airbus entirely by further tidying up its affairs with the sale of its 29% stake in aerospace electronics group Thales.

Thales, of course, is periodically linked to a strategic partnership of one form or another with that other pillar of French aerospace, Safran. For now, a private sale of 8% of Dassault may not amount to much – but this Airbus-Dassault affair potentially foretells a wider restructuring of the French, if not European, aerospace industrial landscape.
[via-flightglobal]