Zodiac / Safran

Zodiac / Safran: Assessing the Consequences of Zodiac’s Profit Warnings

Publication Date: April 3, 2017

Research Report Overview

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?

Contents (56 Pages):

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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