Hedge Fund Urges EADS to Sell Dassault Stake

PARIS â€" EADS, the parent company of Airbus, confirmed Monday that it had received a letter from an influential shareholder urging it to sell its 46 percent stake in Dassault Aviation, the French maker of the Rafale fighter and the popular Falcon business jet.

European Aeronautic Defense & Space, which last week announced a major restructuring of its military contracting and space operations, declined to elaborate on its plans for the holding, which has a market value of around 4 billion euros ($5.3 billion). But the company did not rule out the possibility of divesting the stake in Dassault, which EADS has held for more than a decade and which management has always stressed is a financial, rather than a strategic, investment.

”We will keep shareholders fully appraised of our plans and progress” with regard to the Dassault stake, said Martin Aguëra, an EADS spokesman. ”Central to our strategy is efficient capital allocation and creation of shareholder value.”

In a letter to the EADS chief executive, Thomas Enders, that was dated Friday and made public Monday, Ben Walker, a partner at TCI, a London-based hedge fund that owns just over 1 percent of EADS, argued that the company’s investment in Dassault was a ”poor use of capital.”

Mr. Walker urged Mr. Enders to dispose of the stake in Dassault ”as soon as possible,” either through a direct sale to a third party or via a public offering, and use the proceeds to buy back shares or pay a special dividend to shareholders.

A quick sale is unlikely, however, and any shake-up of Dassault’s ownership structure would be fraught with political complications, given the sensitivity of its military business as well as the company’s status as a French high-tech corporate jewel. Two-thirds of Dassault’s 11,600 employees are based in France.

”Politics will play a large part in this,” said Howard Wheeldon, an independent strategist and fellow of the British Royal Aeronautical Society, noting that the Socialist government of President François Hollande would be loath to see the stake go to a non-French bidder.

As it happens, the French government owns a single ”golden share” in Dassault and has the preemptive right to purchase any shares EADS might divest. But given France’s current budget constraints and its recent moves to sell down state shareholdings in private companies, any pressure on the government to buy a stake in Dassault would likely be unwelcome, analysts said.

”But if there is no other French company prepared to put up money and buy this stake, then, frankly, he’s not got much choice,” Mr. Wheeldon said, referring to Mr. Hollande.

The situation is further complicated by the fact that Dassault Aviation is controlled by the politically powerful Dassault family, which owns just over 50 percent of the company through a holding company, Groupe Industriel Marcel Dassault. Spokesmen for Dassault Aviation did not immediately respond to requests for comment.

Dassault, while respectably profitable, is struggling to maintain its footing after the latest recession eroded demand for its business jets and austerity-driven cuts in European military budgets have clouded the future of its fighter business. Some analysts have suggested that Dassault would be better off if it split into two distinct businesses - business jets and fighters - but the company’s management has so far rejected any talk of a spin-off or merger.

”Dassault is a relatively small, undercapitalized company in what is an increasingly very large and high-risk world of key defense products,” Mr. Wheeldon said. ”EADS potentially walking away is, for Dassault, a very worrying sign.”