Sarkozy Engineers Investment Opportunity – For Airbus and For U.S. Investors.
By William Patalon III
Managing Editor
The newly elected President of France, Nicholas Sarkozy, is already keeping his campaign promises.
And that’s one more reason investors should be looking at France as a top profit opportunity.
In a deal that President Sarkozy helped engineer, a private-equity firm controlled by the Dubai government has invested $850 million to purchase a 3.1% strategic stake in the troubled parent of European airliner-maker Airbus SAS.
The investment – made by Dubai International Capital, a unit of government-owned Dubai Holding – is another illustration of how a Sarkozy-led France will become a market that investors cannot afford to ignore. Indeed, investors who have traditionally kept French stocks on their list of investment “no-fly zones” should view this deal as a harbinger of even better days ahead.
Let me explain …
On Target, Ahead of Schedule
Although he was only elected two months ago, the energetic, well-connected and market-oriented Sarkozy is already attacking some of the key business problems the European Union faces. In June, “Sarko,” as he’s known to both supporters and critics, said attracting new investors to Airbus parent European Aeronautic Defence and Space Co. NV, or EADS (EPA: EAD.PA), would be one of his top priorities. However, he did offer words of caution about the voting-rights restrictions facing any prospective outside investors.
Like a politician campaigning for office, Sarkozy has been zooming back-and-forth across both Europe and the Middle East as he pursues two objectives: An injection of capital for EADS, and additional airliner orders for Airbus.
On June 25, for example, Sarkozy was in Yemen meeting with Yemeni President Ali Abdallah Saleh, promoting the Airbus A350 to Yemenia-Yemen Airways. Airbus already has a deal to sell the Yemeni airline six of those A350s, a troubled aircraft program that’s still in development. The airplane won’t even make its maiden flight until 2012 and the jets aren’t expected to start arriving with airlines until the year after that. In fact, airlines are not bound by their existing orders. Even so, Sarkozy wanted Yemen to consider ordering additional aircraft.
It’s this kind of focus and energy that illustrate the role Sarkozy is destined to play in making both France and the broader European market more competitive in the worldwide financial arena.
The Dubai investment and Sarkozy’s enthusiastic salesmanship couldn’t have come along at a better time for EADS, which holds the controlling stake in Airbus, and which has had to navigate some nasty turbulence in the past couple of years.
What a Difference a Few Years Can Make
Although Airbus and its forerunners have been around in one form or another since the 1960s, it was the launch of the twin-engine, 150-passsenger A320 in the 1980s that really solidified the pan-European airliner company as a serious rival to the globally dominant Boeing Co. (NYSE: BA).
Boeing is the juggernaut of the aerospace sector, a major player in both the military and commercial aircraft markets that has grown both organically and via a series of acquisitions. It initially made its name as the builder of gorgeous biplane fighters for the U.S. Army Air Corps in the 1930s, the B-17 “Flying Fortress” heavy bomber of World War II vintage and the B-52 Stratofortress jet bomber that continues to fly today. Then it changed the airliner industry forever with the 1958 introduction of its sleek Boeing 707 jet airliner. It further outdistanced its global rivals – De Havilland of Britain, Caravelle of France and Tupolev of Russia – when it unveiled its Boeing 747, the globetrotting civil airliner with its trademark humpback silhouette.
Boeing has in more recent years also acquired the aerospace firms that were responsible for such aircraft as the Douglas DC-3 transport/airliner, the X-15 rocket plane, and the P-51 Mustang and F-86 Sabre Jet fighter planes.
Overall, Boeing is the United State’s single-largest exporter.
But Boeing has felt the pinch of competition from Airbus as far back as the 1980s. Airbus kept adding new models to fill in its aircraft product line. There was a commonality between models, which kept Airbus’ production costs down. And the Airbus A320 was a paradigm-shifting airliner, using the super-innovative “fly-by-wire” technology that until that time had been limited to the top military jets only. Boeing had nothing that quite matched up.
In 2001, Airbus overtook Boeing as the world’s largest civil aircraft company as measured by actual orders. Airbus held that lead and, in 2005, the International Herald Tribune newspaper wrote a story about the European airliner manufacturer, featuring the headline: “Airbus Enjoys Ascent to No. 1 Aircraft Maker.”
It wasn’t to last.
A year ago this week, EADS Co-CEO Noel Forgeard and Airbus head Gustav Humbert were ousted as part of a management shakeup necessitated by wide-ranging problems at Airbus. Major production problems and badly missed delivery targets with the Airbus unit’s A380 superjumbo jet caused some of the problems. And there was substantial customer disappointment with the design of the A350, which is aimed at Boeing’s 777 and 787 airliners. Some customers thought Airbus didn’t take the design far enough.
In 2006, Boeing won the annual orders race for the first time since 2000, grabbing 55% of the global deals. It’s on a pace to set a sales record for the year. And it’s going to get a lot of favorable press coverage when it rolls out the much-hyped and highly innovative Boeing 787 “Dreamliner” this weekend.
As a result of its troubles, Airbus early this year announced a restructuring plan that would result in the elimination of 10,000 jobs and the sale of two of its three production sites – one in Germany and the other in France.
In terms of the job cuts, about 4,300 will come from Airbus’ facilities in France, while 3,900 will be shed in Germany, 1,000-1,500 in Britain and 500 in Spain.
EADS said Airbus must cut costs by $6.6 billion by 2010 to boost productivity and make up for the financial losses caused by the A380 delays.
Airbus has also been hurt by weakness in the U.S. dollar – the currency in which its airliners are priced.
With France and Germany wishing to retain control of Airbus over its minority shareholders, experts say the Dubai investment engineered by Sarkozy will prove crucial.
The reaction by the EADS parent and the government partners in France and Germany will be one of ecstatic excitement, said Doug McVitie, managing director of Arran Aerospace, an aerospace consultancy firm based in Dinan, France. Arran added that the stake represented "money with no overt strings attached” – meaning no board seats or the investor demanded other concessions to control.
A spokesman for EADS said the investment was "good news" and noted that the company "always wanted a shareholder structure that’s as broad as possible."
Dubai International Capital has a big block of spare cash and may also look to later boost its stake. The firm has sold other assets this year: It sold the Tussauds entertainment group to Blackstone for $2.1 billion in March, and two months later announced the sale of its $1 billion stake in DaimlerChrysler.
Airbus was also helped by sales drummed up at the highly prestigious Paris Air Show earlier this year, confirming nearly $20 billion in new orders from customers in the Middle East, as well as a separate agreement with U.S. Airways. That followed a year of cancelled orders and delayed deliveries.
The Paris air show, held every other year at Le Bourget airport, where Charles Lindbergh landed after his epic solo transatlantic flight in the Spirit of St. Louis in 1927. Airbus announced orders of $17 billion from Qatar Airways and $2.5 billion from Emirates Airline.
