Safran Shaves $1 Billion From Zodiac Bid After Profit Warnings

(Bloomberg) -- Jet-engine maker Safran SA shaved 1 billion euros ($1.1 billion) from its agreed bid for Zodiac Aerospace SA after reevaluating the seat manufacturer’s worth in the wake of two profit warnings.

Safran will now pay 25 euros a share for Zodiac, according to a joint statement Wednesday, 15 percent less than the 29.47 euros specified in an original accord in January. Including Zodiac debt that has increased in intervening months, the overall value of the deal is about 10 percent lower at 8.7 billion euros.

The decision to go ahead with the purchase may prompt renewed criticism from Safran investor TCI Fund Management Ltd., which says there’s little upside in buying Zodiac when the interiors specialist is struggling to keep up with orders. Safran Chief Executive Officer Philippe Petitcolin says the all-French merger will allow it to provide a far wider range of products to airlines.

While Zodiac’s factories need to be re-organized, simplified and possibly consolidated in order to improve manufacturing processes, the company remains attractive for its “innovation and design,” Petitcolin said on a call with analysts after announcing the revised deal. Supply-chain and product certification concerns also need to be addressed, he said.

Zodiac shocked investors on March 14 when it said full-year operating profit would drop 10 percent instead of rising as previously forecast. The company, based in Plaisir, west of Paris, cited bottlenecks at a Welsh plant that have again disrupted seat deliveries, together with holdups in the production of lavatories in the U.S. for planes such as the Airbus SE A350.

Simplified Structure

The downgraded outlook, Zodiac’s 10th profit warning in less than 2 1/2 years, was followed by a further revision on April 28, when the company said 12-month operating profit would now be in a range of 200 million euros to 220 million euros, representing a slump of as much as 26 percent against 2016.

In a move that may help appease TCI, Paris-based Safran intends to structure the deal as a single cash and stock offer for 100 percent of Zodiac. That involves dropping plans for a two-stage transaction entailing a partial purchase followed by a subsequent share swap that had aimed to make the deal tax-free for the seat maker’s founding families and two investment funds.

Those investors are now expected to tender stock representing 25 percent of Zodiac’s share capital as part of the sale, followed by a remaining 5 percent, giving Safran “exclusive control.”

Safran also now plans to pay out 2.3 billion euros to investors via a share buyback program spanning two years after the takeover is complete, rather than as a special dividend.

TCI, a London-based hedge fund which has previously said Zodiac is worth only 10 euros a share, declined to immediately comment on the revised deal when contacted by Bloomberg.

Shares of both Safran and Zodiac were suspended from trading in Paris prior to the announcement of the revised offer, with the seat maker’s stock having fallen 16 percent to 23 euros since the March 14 update.