Snecma, Sagem merger leaves analysts cold

PARIS, Oct 29 (AFP) – The planned merger of Sagem and Snecma left analysts bewildered Friday at what was seen as a blatantly political move by the government to create a defence industry giant that made little financial sense.

The two companies announced earlier that Sagem, a French telecommunications equipment and defence electronics maker, would takeover French state-controlled aircraft engine maker Snecma in a deal analysts expect to be worth up to EUR 5 billion (USD 6.36 billion).

In terms of sales, Snecma is more than twice as big as Sagem, whose chairman, Gregoire Olivier, only last week told the media his company had no desire to be bolted on to a “large group”.

The deal would see Sagem offer three of its own shares for every 13 shares in Snecma, with a cash alternative of EUR 20 per share capped at EUR 1.25 billion. Sagem would also offer a pre-payment dividend of EUR 0.50 per share.

Once the deal is finalised, the French state’s 66.22-percent stake in Snecma would be reduced to around 33 percent.

The French government was left gloating over the new-born defence giant.

“The tie-up of the two high French high tech groups will allow for a new actor in the European industry,” Finance Minister Nicolas Sarkozy and Defence Minister Michele Alliot-Marie said in a joint statement, adding: “it will beef up European industrial capacities in strategic sectors such as defence”.

But other observers were less impressed.

Deutsche Bank analysts Georges Memmi and Ben Fidler said the proposed merger “appears to us to make little strategic or industrial sense.”

“The operational overlap between the businesses is minimal and the deal represents a major strategic shift for Sagem,” they added.

The companies have said they expect costs savings from their merger to reach EUR 160-190 million per year pretax from the third year of operation.

Even Alcatel chief executive Serge Tchuruk, speaking on France Info radio, said the merger looked like a political decision “taken quickly, doubtless by the finance ministry,” and an analyst at a major US brokerage called the deal “blatantly a (government) stitch-up.”

Analysts were united in having doubts about the industrial sense of a merger and the US analyst said: “It’s really hard to see where the synergies are going to come from.”

Fortis Bank analyst Stephane Houri said the group’s financial plan looks “clever” and positive for earnings.

“But there are still too many questions. I’m still not positive on this merger.

There are doubts about how they will present the merged company and you have to wonder if they will make all the synergies given that they are from things like marketing rather than proper cost savings.”

A trader at KBC Securities said the merger “doesn’t really make sense for Sagem, their shares will probably move sharply down. There’s no sense in being a Sagem shareholder right now … but it will benefit Snecma.”

“The real question is where will they get synergies from, where will they get any value for shareholders,” he added, noting comments from Snecma chief executive Jean-Paul Bechat that the merged entity is not considering job losses, as the two groups’ activities do not overlap.

The companies earlier said that they expected Sagem’s technical expertise in electronics to “find new outlets through applications on Snecma’s aircraft engines and equipment.”

“In the same way, Snecma would provide Sagem with access to an extended international commercial network,” they said.

In afternoon trading, Sagem shares were off EUR 6.75 or 8.58 percent at EUR 71.95 after being suspended for the morning session. Snecma shares rose EUR 0.75 or 4.66 percent at EUR 16.85 after resuming trade.

Meanwhile the CAC-40 index of leading share was flat.

Shares in French defence electronics firm Thales were up EUR 0.65 or 2.36 percent at EUR 28.20 on speculation that the company could join the merged group eventually.

Some analysts were baffled why Snecma, and not Thales, was being merged with Sagem.

Analysts at Aurel Leven said: “We’re wondering why Snecma had refused to merge with Thales. A merger with the latter would have made much more sense.”

“This would have created a major player in the aerospace and defense sector which would have been in a position to compete in the global industry,” they said.

Subject: French News