Publication Date: April 3, 2017
A complex web of pressures faces Safran’s board in its pursuit of Zodiac, and it will take a lot of handholding to appease the ambitions of key shareholders (Zodiac’s reference shareholders, TCI, the French state), in structuring a deal that addresses tax consequences (at a fair price), while offsetting potential long-term risks due to questionable due diligence and botched execution. By far, the easiest move for Safran is to walk away, and Zodiac’s latest profit warning gives Safran a one-time opportunity to save face, pain- and litigation-free. In this report, we present balanced arguments based on our analysis of the companies and key shareholders, to answer, amongst other questions: 1) Will Zodiac’s reference shareholders accept a lower offer, knowing that a failed transaction will dismiss a formidable partner and lead to a substantial decline in Zodiac shares?; 2) Will Safran continue to pursue Zodiac and, if so, will it lower the deal consideration and/or amend the deal structure?; and, 3) How will Safran’s shareholders, including TCI, react to a new deal, and is there anything activists can do to prevent an amended transaction from consummating?
1. Situation Overview, Deal Structure and Timing 2. Zodiac’s Operational and Financial Problems 3. Safran’s Rationale for Pursuing Zodiac 4. Behind Zodiac’s Reference Shareholders: Families, FFP, FSP 5. Deal Benefits to Zodiac Shareholders and Accepting a Revision 6. Behind Safran’s Key Shareholders: the French State, Employees, TCI 7. If Safran Pursues: Fair Price for Zodiac; Multiple and Margin Arguments 8. If Safran Walks: Break Price for Zodiac; Covenant and Rights Issue Risks 9. TCI Fund’s Arguments, Against the Structure and Transaction 10. TCI’s Threats and Possible Actions and Agendas 11. A Feasible Structure, M&A “Acquirer” Activism and Precedent Deals 12. Risk Arbitrage Thoughts
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