By Tim Hepher and Cyril Altmeyer
PARIS (Reuters) - French aero engine maker Safran (PA:SAF) on Thursday launched a $9 billion agreed bid for seats manufacturer Zodiac Aerospace (PA:ZODC) to create the world's third-largest aerospace supplier as the industry bulks up to tackle record high output plans.
The deal comes three months after Zodiac's rival B/E Aerospace agreed to be absorbed by Rockwell Collins (N:COL) and six years after Zodiac's family shareholders publicly snubbed a botched approach from Safran, branding it "opportunistic".
The two have frequently been linked as suppliers combine technologies and services to support rising aircraft production.
But some analysts warn such a tie-up is risky as Zodiac recovers from a nearly three-year cabin production crisis that disrupted some Western jetliner deliveries.
Safran Chief Executive Philippe Petitcolin said he was not worried about Zodiac's recovery from recent production and quality problems in its U.S. seat manufacturing plants and pledged not to let the deal distract Safran from development of new 'LEAP' engines for Airbus (PA:AIR) and Boeing (M:BA).
"Don't worry, there will be no transfer of skills from LEAP," he told reporters in a conference call.
Zodiac has always said it would stay independent and scoffed at Safran's original approach in 2010, saying any tie-up would offer "very slight" synergies with most of its business.
But after a series of profit warnings, Chief Executive Olivier Zarrouati said last March Zodiac would be "receptive to any offer that is in the interests of the company".
Safran and Zodiac declined to say when the latest round of negotiations had started, but two people familiar with the deal said it had come together "very quickly," negotiated by a tiny group led by the CEOs and chairmen of both companies.
Despite earlier rumours of a tie-up, the people said the idea of a merger began to get serious attention in November and December, suggesting it may have received a boost from October's $6.4 billion U.S. takeover of Zodiac's main rival B/E Aerospace by Rockwell Collins.
"Sector consolidation is something you can see happening," Zarrouati told Reuters, adding aerospace contained few remaining opportunities for deals on such a scale without significant overlap that could fall foul of anti-trust regulators.
Zodiac's chairman Didier Domange said the talks had got off to a better start than in 2010, when family shareholders bridled at what many regarded as a clumsy approach from Safran, a state-backed company at that time digesting a troubled internal merger.
Zodiac did not consider other potential partners, he said.
However, the speed and secrecy of the talks raised questions over how much first-hand evidence Safran had been able to collect on Zodiac's recovery from industrial problems, potentially diverting Safran from its crucial new engine project.
"To be taking on Zodiac, with its recent execution issues, is arguably doubling up on risk," Vertical Research Partners analyst Rob Stallard said in a note.
Safran and its engine partner General Electric (N:GE) plan to produce 2,000 LEAP engines a year by 2020.
"There is no room for any disruption on these developments or production increase," Petitcolin told Reuters.
He also said synergies or benefits from the deal could far exceed an initial estimate of 200 million euros ($211.96 million) annually. Wells Fargo (NYSE:WFC) analysts said these were similar in relative terms to those promised by B/E Aerospace, which some investors had found challenging.
TWO-PART DEAL
Zodiac is controlled by various French families, including those of its chairman and the Peugeot carmaking dynasty.
Its roots date back to 1896 with warships and airplanes. It gave its name to the fast inflatable boats whose sales rocketed in World War II, but it sold its maritime business in 2007.
Now, it is mainly known as one of two major suppliers of aircraft seats and cabin fittings alongside B/E Aerospace.
The industry faces rising demand for sophisticated cabin interiors but has struggled to adapt such one-off, customised projects to the fast pace and high volumes dictated by a recent boom in jet orders.
Under the two-part deal, Safran will launch a cash offer of 29.47 euros per share, a 26 percent premium to Wednesday's close. That part of the deal values Zodiac at 8.5 billion euros ($9 billion).
Zodiac shares accordingly rose 22 percent, paving the way for their best day in 30 years but indicating investors did not expect other bids. Safran fell 2.8 percent after initial gains.
Under stage two, Zodiac's controlling family shareholders would not take up the cash offer, but would instead fold their shares into a subsequent merger between the two companies, based on 0.485 Safran shares for each Zodiac share.
In addition, Safran shareholders would receive a special dividend of 5.5 euros a share before the deal closes in 2018.
Analysts said the total cash and equity transaction would be worth 9.7 billion euros.
Zarrouati was named deputy chief executive of the combined group, but his duties remained to be defined. Petitcolin’s tenure is due to be extended.
The companies said the combination would boost earnings per share from the first full financial year.
The French state owns 14 percent of Safran and will remain a shareholder of the combined group under a pact with other core shareholders.
($1 = 0.9436 euros)