NEWTOWN, Conn. -- Safran continues to push into growing aerospace markets thanks to a series of acquisitions over the past few years. Of particular interest is the "electrification" of aircraft, which is poised to be the next growth market in aerospace as it promises even more aircraft efficiency.
The keystone to this new focus is the acquisition of Zodiac Aerospace. Originally announced in early 2017 in a deal valued at $9.1 billion, Safran later amended its offer due to deepening problems at Zodiac's factories. Under the new offer, Safran will pay around $7.7 billion for the company. Despite the issues at Zodiac, Safran is still sweet on the deal, as it desires to strengthen its presence in the civil aerospace sector. Safran attempted to acquire Zodiac in 2010 but was rebuffed. Zodiac's weakened share price following the seating delivery issues likely made it an even more attractive acquisition for Safran.
In February 2018, Safran acquired a majority of the shares (over 80 percent) of Zodiac, effectively taking control of the company. The deal was ultimately consummated in December 2018 when shareholders from both companies approved the deal. The combined entity will unite Safran activities, which span turbines, landing gear, brakes, and avionics, with Zodiac's cabin interiors and fuel, lighting, safety, and power-distribution gear - making Safran more of a one stop shop for OEMs. Further, the deal expands Safran's interests in North America, where Zodiac has a large industrial presence. This should help decrease the combined firm's currency exposure in the aerospace industry's dollar-denominated market. Zodiac Aerospace is one of two major suppliers of aircraft seats, the other being B/E Aerospace, which was acquired by Rockwell Collins and, is in turn, in the process of being acquired by UTC Aerospace Systems. Both acquisitions are part of an industry trend in which subcontractors to Airbus and Boeing are expanding operations to better handle the record airliner backlogs at the OEMs. The goal of this consolidation among Tier 1 suppliers is to gain a stronger position from which to negotiate with OEMs. Perhaps the icing on the cake is that the merger unites two of France's aerospace groups into a new national champion. With governments often becoming more isolationist these days, this all-French solution is expected to be well received at home.
This strategy has served the company well in the past. For example, the company bolstered its position in aircraft power systems with the acquisition of Eaton's Aerospace Power Distribution Management Solutions and Integrated Cockpit businesses in 2014. Before that, Safran added Goodrich's aerospace electrical power business, which United Technologies divested as part of its antitrust obligation. The unit was combined with Safran's existing electrical systems operations and, with the addition of the Eaton operations, has made the company a rival to UTC Aerospace Systems.
With these acquisitions having had time to simmer, Safran moved to reorganize its operations in order to better take advantage of the synergies between its old and new units. The company has reduced its five units to three, combining Aircraft Equipment, Defense And Aerosystems divisions into a single unit, while slightly tweaking the composition of group's existing Aerospace Propulsion and Aircraft Interiors divisions.
The changes in operational management are designed to accelerate the implementation of Safran's development strategy, particularly as regards more electric aircraft and connected cabins. Safran's overall strategy of late is to gain critical mass in an emerging industry, as Safran is banking on next-generation airliners to make a technology shift away from hydraulics toward systems that are more electric - something echoed in the rationale behind the Zodiac Aerospace purchase. Electrical systems are one of the key technologies that make modern aircraft more efficient. This drive for efficiency is a major factor behind the recent aerospace boom.
Another key technology in new aircraft designs are fuel-efficient engines. Safran Aircraft Engines, through its joint venture with CFM International, has developed the new LEAP engine to meet this demand. There is a backlog for well over 15,600 LEAP engines, representing years of work. Production of the LEAP engine is set to increase sharply in the near term as newly re-engined narrowbody airliners from Airbus and Boeing continue to enter service.
With engines and aerospace components making up the core of the company's operations, Safran is now looking to further sharpen its focus. The company's defense operations are undergoing scrutiny. As defense accounts for only about 7 percent of the company's current sales, additional divestitures could be in the offing, as synergies between the remainder of the group's operations are not apparent.
Overall, Safran's management is doing a solid job of using today's success to fuel tomorrow's growth.
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