Activist Fund TCI (The Children Investment Fund) challenges EADS!


The activist Children Investment Fund, already famous for its historical assumption of position over the 2012 aborted merger of NYSE Euronext and Deutsche Börse, just requested publicly EADS to sell its 46% stake in the French aerospace Dassault Aviation.

In a letter addressed to EADS’ CEO, Tom Enders, TCI pointed out that this stake in Dassault, the maker of the Rafale Fighter, worth EUR 4 billion at today’s market value, represents “a poor use of capital”, not carrying “any technological synergy” and appears to be of “a limited strategic interest”. TCI’s principal, Ben Walker was backed by some analysts such as proxy advisor ECGS-Proxinvest, while according to François Hesbourg, special adviser at the Foundation for Strategic Studies in Paris, “the stake is a pile of money frozen into a largely sterile   minority shareholding.”

“You affirmed with insistence that EADS was now a “normal company” in terms of governance, which aims at maximizing profit and shareholders’ interests,   wrote Walker. This spin-off would represent an important test (…). We see no reasons to delay the selling process of this stake” he added according to the Financial Times.

 For the record EADS at the beginning of 2013 sacrificed its minority shareholders in an unfair share buy-back operation in order to accommodate the specific interests of former private French industrial sponsor and important shareholder, Lagardère. ECGS through its French Partner Proxinvest was the only one to deservedly guess and criticize this unjustified violation of the principle of shareholders equity, disregarding the denials of the company while other proxy agencies naively accepted the deal favoring Lagardère.

After this controversial maneuver, happily taking place in a favorable market trend, EADS simplified its shareholder structure and governance last spring, minimizing the influence of French and German governments.  But the company maintained some advantages by a shareholder pact giving the French Government a pre-emption right on the Dassault stake plus the right of refusal of the sale of a single Dassault Share.

According to Kepler Cheuvreux, EADS consolidated EUR 1.8 billion from its 46 % stake in Dassault since 2001 and actually Dassault currently gains more from its civil aeronautics division than from the military sales. But the new contract to supply 126 Rafale fighter aircraft to India potentially worth USD 20 billion could further support TCI’s argument.

The hedge Fund which only holds 1 % of EADS’ stake, by directly addressing the French State, undoubtedly aims to get itself talked about and opportunely increases the value of EADS share which appears still undervalued due to a relative abstract communication and a lack of shareholders in Europe.  With a stock price of EUR 45, a multiple of 16 times the 2013 net income plus 21 analysts out of thirteen with buy recommendations, TCI move should be successful. The real target here is evidently the indecisive French State and as we have already seen it at Safran and Air France this year, corporate governance defaults along with poor communication are responsible for the weakening of French Industrial Public companies.

London, August 8th, 2013