Safran rejects TCI criticism of Zodiac Aero bid

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By Tim Hepher and Cyril Altmeyer

PARIS, Feb 23 (Reuters) - France's Safran (LSE: 0IU8.L - news) has rejected criticism by a UK hedge fund over the strategy, structure and financial terms of a proposed $9 billion friendly bid for Zodiac Aerospace (LSE: 0NR6.L - news) and says it stands by its plans to acquire the seats manufacturer.

Stepping up a war of words over its agreed offer to create the world's third largest aerospace supplier, the French aero engine maker has sent a six-page rebuttal to TCI Fund Management and accused it of waging a public campaign to undermine its project.

TCI has questioned the strategic benefits of the deal and accused Safran of paying a "hugely inflated price" for Zodiac, which has issued around eight profit warnings in the past two years due to a production crisis in its interiors business.

It also objects to aspects of the deal's complex structure, which calls for a cash offer followed by a merger to bring on board Zodiac's core group of family shareholders. TCI believes shareholders should be able to vote on the merger plan before the cash bid for at least 50 percent of Zodiac goes ahead.

In an open letter to TCI, Safran defended its strategy of diversifying from its core aero engines business to gain access to Zodiac's profitable aircraft equipment activities, and expressed confidence in its financial goals.

"The board is not for turning," Safran Chairman Ross McInnes told Reuters on Thursday when asked whether the company would modify the terms or structure of its proposal to acquire Zodiac.

Chief Executive Philippe Petitcolin said Safran was confident of lifting Zodiac's operating margin to its historic levels of at least 14 percent.

"Even (Taiwan OTC: 6436.TWO - news) excluding the dollar effect, we should be able to restore them to the level of profitability they had before the (seats production) crisis within 2-3 years," he told Reuters.

TCI owns about 4 percent of Safran and is also a shareholder of Zodiac.

The fund, which recently clashed with German carmaker Volkswagen (IOB: 0P6N.IL - news) , sent an open letter to French market regulator AMF earlier this month to protest against Safran's offer, saying it risked violating shareholders' rights.

It later said it had support from several American and European funds..

Under the deal, Safran aims first to convince ordinary investors, which hold 68 percent of Zodiac, to sell their shares in the company for cash.

If more than half of those investors accept, the deal will proceed to the second phase.

This would offer core shareholders a chance to keep their shareholdings through a merger, taking advantage of French law that allows certain groups of long-term shareholders to maintain tax breaks - key to getting the families on board.

Safran shareholders would also get a special 5.5 euro per share dividend before the merger.

According to TCI, launching the first part of the offer - a cash bid aimed at ordinary investors - before allowing shareholders to vote on the subsequent merger would both violate the rights of Safran shareholders and deprive Zodiac investors of equal access to information for all shareholders.

In its response, Safran said the request for a prior vote "has no basis under French corporate law and is out of line with sound governance principles".

(Reporting by Tim Hepher; Editing by Mark Potter)