Search Follow us
8 September 2016 · 4 min read

Safran and Zodiac - do opposites attract?

A look at two very different French Aerospace companies

Safran and Zodiac are both French, both exposed to the structural growth of the civil aerospace industry, and both have world class products. But it is there the similarities end. Over the past five years, Safran has proved itself to be a well-run company with strong project execution. Zodiac’s management and execution has been found sorely wanting as it struggles to keep pace with the production ramp ups at Airbus and Boeing. Last week saw Zodiac’s ninth profit warning in two years, but interestingly over the past couple of months there has been a resurgence in market rumours that Safran is potentially interested in acquiring the company. Why are the two companies such a different investment proposition, and do they really have a future together?

It is all too easy to think of the French Aerospace & Defence sector as a homogeneous group of companies, notoriously subject to state control and unable to be competitive internationally due to high wage costs. Frequently there are calls for consolidation amongst the numerous players in order to create a state champion rather than a number of smaller companies who compete for a share of the global market. The names of Airbus, Safran, Thales, DCNS, Zodiac Aerospace and Dassault Aviation all get mixed in together.

It is widely acknowledged that Airbus is now in a league of its own, comparable only to its US rival Boeing. Safran is arguably also now a member of the aerospace elite. Its joint venture with GE, CFM International, produces the world’s best selling jet engine – the CFM56 – which is used on Boeing 737 and the Airbus A320. This year CFM started producing the new LEAP engine which will be used on the 737MAX and A320Neo. The development of the engine has gone well so far and managing the production ramp up is the main challenge for Safran’s relatively new CEO, Philippe Petitcolin, who was previously the programme manager.

Zodiac Aerospace, which supplies aircraft interiors, is currently languishing at the other end of the spectrum, despite being exposed to the same end market as Safran. It should be reaping the rewards of increased production at Airbus and Boeing, but instead the family run company has issued a string of profit warnings over the past two years. It has repeatedly pledged, yet failed to fix recurring problems of seat production for the A350 at plants in the United States. Airbus has publicly accused Zodiac of being “in denial” about the severity of the problems and has refused to work with the company on future projects.

So why are these two companies, who are seemingly poles apart, being talked about in the same breath? Safran’s CEO has said he wants to focus the company on civil aerospace, and is on the look out for growth in the aircraft equipment market to augment Safran’s landing gear and nacelles businesses. If Safran were to buy Zodiac, it would make a company resembling two divisions of United Technologies; Pratt & Whitney (engines) and UTC Aerospace Systems (aircraft equipment).

Safran and Zodiac have history together. In 2010 Safran proposed an offer which Zodiac’s board unanimously rejected with the CEO Olivier Zarrouti saying “Zodiac isn’t looking for a partner and has a good outlook as a stand alone company. The outlook for Safran is modest and the industrial synergies are weak.”

Six years on, Safran is in a position of strength compared to Zodiac, so negotiations could look quite different. However, Zodiac maintains it is not for sale and Petitcolin is acutely aware that Safran’s management has been criticised for its acquisition track record. His disposal of the Morpho security business suggests that Safran is now focusing on what it does best. It seems to me that distributing any surplus cash to shareholders is a far better idea than paying a premium for a struggling business with few industrial synergies.


Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.