April 28, 2017
MAKOR MERGER ARBITRAGE COMMENT - ZC FP / SAF FP - OUR THOUGHTS ON ZODIAC'S H1 RESULTS
Zodiac continues to be very supportive of a deal with Safran and have said that they have provided Safran with all the additional required information and now the decision remains up to Safran whether or not a transaction is ultimately reached. A transaction with Safran is Zodiac’s preferred strategy although they reiterated that they also have very good standalone prospects which Zodiac have strong confidence in. Zodiac is expected to operate under “normal conditions” by the end of 2017.
Zodiac reported better H2 guidance aided by a ramp-up of electrical systems activity, a strong order book in Data Systems to deliver in H2 and their “Restore Margin” action plan. Zodiac have pushed back their double digits margins target to 2019 from 2018 and reiterated its target of a “mid-double digit” current operating margin by fiscal year 2018/2019. Zodiac expect to fully eliminate disruption costs by end FY19. FY 16/17 COI is now estimated between €200m and €220m.
In the call this morning, Zodiac denied the need for a rights issue. They also stated that their banking covenant is to be respected at year end and medium-term financing has been fully secured.
We remain convinced by the strong strategic rationale for Zodiac and Safran to do a deal. We also note the comments from TCI reiterating that Safran is overpaying for Zodiac. While a small reduction (c.10%) in the mooted €29.47 offer price could be warranted we note that the families are highly unlikely to accept a significant reduction in the Offer Price. The Domange family has commented that they are expecting the Safran offer in c.1month and that they see a Zodiac improvement in a few quarters and that Zodiac has not lost the trust of most of its clients.
Zodiac continues to battle industrial issues particularly in their seats branch which they say are currently being addressed. Zodiac Seats US is back to its normal operational performance but Zodiac Seats UK should return to normal performance by December 2017 as Zodiac have transferred their production to other Group facilities (however this has resulted in cost penalties).
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