Safran H1 falls, to sell mobiles unit, shrs fall

By Tim Hepher and Matthias Blamont

PARIS (Reuters) - French conglomerate Safran (SAF.PA) said it would sell its loss-making mobile phones business to venture capital firm Sofinnova as it announced a fall in first-half profit and an outlook which sent the stock sharply lower.

Formed in 2004 through an awkward alliance between state aircraft engine maker Snecma and telecommunications equipment maker Sagem, Safran has looked to exit the unprofitable handsets business for more than a year.

It aims to refocus on its core aerospace and defence security businesses.

It is effectively paying Sofinnova to take on the activities of a company to be re-named Sagem Wireless in which it will keep a 10 percent stake.

"We will participate in the financing of the new company," Xavier Lagarde, a member of Safran's three-person executive board, told Reuters in a telephone interview.

He said Safran would not receive cash from the sale.

Sagem Wireless will keep 310 of 690 current staff in what had been Europe's last domestically produced handsets business. Of those, 240 will be based in China.

Most of the others will get jobs elsewhere in Safran though redundancies cannot be excluded, Lagarde said.

"We need research and development people. Our security business is growing and had twice its revenues in orders so far this year, so we have to deliver on those," he said.

Safran took a 74 million euro charge in the first half in connection with the sale and said it expected to write off another 100 million euros in the second half. It expects the total cost of the handover to be 220 million euros.

Safran shares fell by as much as 12 percent, weighed by concerns over the costs of the sale as well as lower mid-year aerospace profits, analysts said.

"There remain questions on the way in which mobiles will be acccounted this year, especially as new costs are expected in the second half," Kepler Equities analyst Pierre Boucheny said.

Safran was down 9.51 percent at 11.70 euros as of 1105 GMT.

Safran said it was maintaining 2008 forecasts of 10 billion euros in sales and an operating profit of 750 million euros, excluding mobiles. But Deutsche Bank, downgrading the stock to Sell from Hold, said this proviso implied a 10 percent cut in guidance.

NET DOWN 27 PERCENT

Safran reported a 27 percent fall to 156 million euros in first-half group net profit. Recurring operating profit fell 14 percent to 328 million despite a 2.7 percent increase in sales to 5.057 billion.

Safran said a weak dollar hurt profits in Aerospace Propulsion. Operating profit fell to 278 million euros from 297 million as margins fell to 9.7 percent. Aircraft equipment profits fell to 47 million euros for a margin of 3.3 percent.

Chief Executive Jean-Paul Hertemann reiterated at a news conference that a tie-up with defence electronics firm Thales (TCFP.PA) was not his preferred option. That contradicts recent efforts by Safran's chairman, former finance minister Francis Mer, to orchestrate a merger of the aerospace suppliers.

The merger which formed Safran in 2004 was backed by then finance minister Nicolas Sarkozy as a savvy union of heavy engineering and cutting-edge technology.

But Safran shares suffered as losses stacked up in communications, provoking bitter internal quarrels and as investors failed to warm to a group with products as diverse as jet engines and fax machines.

The handsets sale will complete Safran's withdrawal from telecoms after it sold its broadband unit in January.

Safran still owns Sagem's Defence Security business, which makes up some 18 percent of the slimmed down group's revenues.

(Editing by Jason Neely)