Almost two years ago, the merger of two of France's biggest aerospace suppliers, Snecma and Sagem, was greeted with surprise. But on the surface at least the deal was completed swiftly and painlessly, with the two businesses coming together under a new name - Safran - and former Snecma boss Jean-Paul Béchat stepping up to head the four divisions of the new business, which offers everything from aeroengines to photocopiers.
Since the birth of the new company, however, there have been persistent rumblings about two key issues - management and financial performance. There have been ongoing tensions between senior executives from the Snecma and Sagem divisions since the deal was done in March last year, and the spectre of government interference - the French state still owns 31% - looms large.
Meanwhile, investors have consistently expressed concern about the Sagem business, its financial performance and its future within the company, despite the healthy overall performance of the group as a whole. The €200 million ($265 million) in synergies the group said it would be able to draw on by combining Snecma and Sagem forces has always been considered an extremely ambitious figure, given the diversity of the two businesses.
But both issues have now come to a head: Safran's management structure is being overhauled in a shake-up that will see Béchat - one of the aerospace industry's longest-serving chief executives - stepping down in the third quarter of next year, and chairman of the supervisory board Mario Colaiacovo leaving in January.
And at the same time the company is gearing up to face some tough questions over financial performance, following the profit warning issued over accounting irregularities in its Defence and Security Systems division that could leave a €100 million hole in its 2006 profits. Defence and security posted a loss of €44 million in the first half of the year, compared with earnings of €40 million in the first half of 2005. The company has now launched an independent fraud investigation into the accounting anomalies, which auditor KPMG discovered in the files of Sagem defence security's former chief financial officer Jacques Paccard after his departure in November.
On the surface, Safran has been doing well since its birth. The buoyant commercial airliners market - it is a prominent supplier to Airbus and Boeing - means its engines and equipment divisions have been flourishing. Earnings before interest and tax at the company's propulsion division were up from €195 million in the first half of 2005 to €227 million in the first half of this year, while aircraft equipment earnings rose from €113 million to €117 million. The company will report its 2006 results in February.
The former Sagem business, however, has been struggling. Although its defence electronics sector has won notable deals, the consumer electronics side has continued to lose money. The communications sector slumped from an €11 million loss to a €67 million loss. And it is in this division that the latest blow has hit the company, forcing it to issue a profit warning to investors.
Safran admits that while the aircraft equipment and aerospace propulsion divisions are in line with the restated objectives of €11 billion in revenues, with an operating margin of 4% of consolidated sales for 2006, the communications business will contribute less than planned because of a sharp downturn in mobile phone business during the last quarter and the consequent depreciation of some intangible assets.
The high-profile resignations of Béchat and Colaiacovo may provide a short-term solution to the internal bickerings that have troubled the company, but analysts agree that they bore all the hallmarks of ministerial meddling, and this is cause for concern. Safran is still 31% owned by the French state (see graph), so perhaps this should come as no surprise. But there are fears that, far from providing a fresh start for the business, the upheaval - and in particular the fact that the company is being forced to bow to pressure from this major shareholder - will reduce its ability to deal with two of the major issues it must overcome to turn around its fortunes: its consumer handset business and the impact of the ongoing weakness of the US dollar.
One analyst argues that the company must "implement drastic restructurings to cope with US dollar weakness", but "given the political interference within Safran, we believe delivering on this would represent a major challenge for the new management," he warns.
While a change in senior management has been expected for some time, the analyst expresses caution over the loss of a man with unparalleled experience of the business, and warns that it could begin to harm the part of the business that is currently performing well. "We believe such a decision could only trigger downside risk to the expected performance of ex-Snecma businesses," he says.
Source: Flight International
