Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

An activist investor with a host of successes under its belt is taking on the French state. It has common sense on its side.

TCI Fund Management Ltd., led by Christopher Hohn, wants to thwart the 9.7 billion euro ($10.2 billion) purchase of aircraft interiors group Zodiac Aerospace by aerospace giant Safran SA. At the very least it wants shareholders to have a proper say on the deal. That's hard to argue with.

The strategic logic of combining Safran and poor-performing Zodiac is far from compelling. How will Zodiac sell more aircraft toilets by joining a group that makes the much higher valued bits of a plane? It's not as if the combination can make customers buy more aircraft.

Inauspicious Signs
Zodiac's profit warnings have dragged the shares below peers
Source: Bloomberg

From the perspective of the French state, the combination would at least provide a fix for Zodiac by giving it a strong parent. But, as Gadfly has previously argued, the risk is that a deal just lumbers Safran with Zodiac's problems.

The financial logic is also open to doubt. Safran says the deal will cover its cost of capital in three years, based on extracting 200 million euros of annual savings -- a figure it says is conservative. Add that to analyst forecasts of about 700 million euros of Zodiac operating profit for 2020, tax it at 25 percent and the deal delivers a 7 percent return on its price tag. It would take a few more cost cuts, and more time, to exceed the estimated 8 percent cost of capital threshold.

Plus it's hard to be quite so sure of Zodiac's future performance. Forecasts have been slashed of late. Believing Safran's pledge that the deal will make adequate returns means believing there will be no more slips. TCI, for its part, doesn't buy that. It reckons the deal will never achieve higher than a 6 percent return even if everything goes right.

TCI's call for the deal to be put to shareholders properly is perfectly reasonable. As things stand, Safran would first buy a big stake in Zodiac for cash and then merge with what's left (the structure favors Zodiac's big shareholders). Yet investors will be able to express their view only after the first stage, which rather ties their hands. A vote to block the merger would be expensive at that point: Safran would already hold a big block of Zodiac shares that would be then hard to shift.

To remedy this, TCI wants an earlier vote on the merger at the June annual meeting -- if the company doesn't bring the vote forward itself. It's also appealing to the French regulator.

Rapid Descent
Safran shares have lagged industrial stocks since the mid-January deal to buy Zodiac
Source: Bloomberg

The argument comes down to trust in Safran's management. CEO Philippe Petitcolin ought to know this business better than anyone and he believes in the deal. But the market seems to share TCI's skepticism, based on the fall in the Safran share price since the takeover plan was announced.

It can look weak if management is always asking shareholders how to run a company. But in this case, fully explaining the deal and giving shareholders a say on the whole transaction would show conviction.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Chris Hughes in London at

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James Boxell at