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Safran to Review Zodiac Warning Effect on $10.2 Billion Deal

Safran to Review Zodiac Warning's Effect on $10.2 Billion Deal

(Bloomberg) -- Safran SA’s 9.6 billion-euro ($10.2 billion) acquisition of aircraft-seat maker Zodiac Aerospace SA, already facing opposition from an activist shareholder, was thrown into further disarray after Zodiac cut its outlook again, raising pressure on Safran to cut the price or abandon the deal outright.

Zodiac shares fell the most in more than a year, and now trade for 22 percent less than the Safran bid. Operating profit will fall 10 percent in the fiscal year ending in August, rather than the increase of 10 percent to 20 percent predicted earlier, Plaisir, France-based Zodiac said in a statement late Tuesday. Zodiac cited capacity 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 Group SE A350. 

“Safran and Zodiac Aerospace are continuing their exclusive negotiations and will take into account the consequences of these developments in their discussions,” the engine manufacturer said in a separate statement. Zodiac’s warning “reflects new developments compared with the information available” when the deal was announced Jan. 19, Safran said.

Safran to Review Zodiac Warning Effect on $10.2 Billion Deal

The revised outlook, Zodiac’s 10th profit warning in less than 2 1/2 years, makes it likely Safran will cut the price, analysts said. It also bolsters the argument of TCI Fund Management Ltd., a Safran investor that opposes the transaction. Ben Walker, a TCI partner, said in an email that Zodiac’s comments indicate it’s in breach of debt covenants, describing the update as “catastrophic” and urging the engine maker to “walk away or substantially reduce the offer price.”

TCI will seek to oust Safran Chairman Ross McInnes at the annual meeting in June if the company doesn’t cancel the deal, Christopher Hohn, TCI’s founder, said in a letter to McInnes published Wednesday. A Safran spokeswoman said the company had no further comment.

Tender Offer

Safran remains interested in buying Zodiac and is confident it can revive the target’s struggling businesses, the Paris-based company said.

The acquisition agreement calls for Safran to buy a majority of Zodiac in a cash tender offer at 29.47 euros a share. The acquirer then will purchase the remaining shares, including those held by Zodiac’s founding families, the French state and two other key investors, in a tax-free stock swap. The completion of the tender offer is expected by the fourth quarter of this year, with the subsequent merger occurring by early 2018, as employee groups must be consulted first.

Zodiac plunged 17 percent to 22.89 euros at 4:45 p.m. in Paris, below the price of 23.31 euros on Jan. 18, the day before the transaction was announced. The shares had gained 26 percent this year through Tuesday, buoyed by the Safran deal, after falling the past two years.

TCI has waged a publicity campaign against the planned takeover, saying Safran was paying too much and that Safran holders should have a chance to vote on the acquisition before the tender offer.

Core Shareholders

Without a takeover, Zodiac shares would be worth 15 euros or less, TCI’s Walker said Tuesday. TCI has condemned the deal as favoring Zodiac’s controlling family and core shareholders by letting them avoid taxes through the stock swap.

Safran could cut the price of its Zodiac offer by 10 percent to 15 percent, according to Scorpeo Analytics, which advises institutional investors on takeovers. The buyer could reduce the value of the stock swap to below the cash tender offer price, according to the firm. That would encourage Zodiac stockholders to tender their shares for cash and not wait for the stock swap, Scorpeo said. At least 50 percent of Zodiac shares must be tendered in the cash offer for the deal to go through.

A price cut is inevitable, with the reduction likely to be at least 10 percent, according to Stephane Mardel, co-chief executive officer of advisory firm United First Partners. The probability of the deal going through in its current form is now roughly 60 percent, down from 75 percent earlier, Raymond James analyst Harry Breach said in a report. The analyst reiterated a “market perform” rating on the shares, citing a positive view of the aerospace cycle and Zodiac’s continuing ability to win significant contracts for cabin interiors.

Slow Deliveries

Airbus, ramping up its new A350 wide-body program, has been consistently held back by slow deliveries and poor quality of the lavatories supplied by Zodiac. Airbus managed to deliver 49 A350s last year, one short of a goal of 50, though hasn’t disclosed a specific target for this year. It’s planning to reach a rate of 10 A350s a month in 2018.

Safran wasn’t told about the emergence of the issues at the Welsh plant late last year before making its offer in January, Zodiac Chief Executive Officer Olivier Zarrouati said.

“The fact this appears to be ‘news’ to Safran is indeed an indictment on the
lack of due diligence performed during and post deal announcement,” Scorpeo said.

Zarrouati told analysts on a conference call that he expects Zodiac to return to its forecast earnings trajectory from the middle of this year, boosting earnings in fiscal 2018. The company had an operating profit of 269 million euros in fiscal 2016, so that the new guidance implies an earnings reversal of as much as 80 million euros.

While the company reconfirmed guidance for “mid-double-digit” growth in fiscal year 2020, it didn’t repeat earlier targets for “double-digit” growth in fiscal 2018.

--With assistance from William Canny

To contact the reporter on this story: Andrea Rothman in Paris at aerothman@bloomberg.net.

To contact the editors responsible for this story: Chris Reiter at creiter2@bloomberg.net, Phil Serafino, Tom Lavell