UPDATE FOLLOWING Q2 RESULTS: PRICE CUT NOW AN EVENTUALITY
Zodiac Q2 trading update published yesterday are likely to be seen as disappointing by the market. The magnitude of the warning will be seen as a threat to the deal in our view by some investors. We think the deal is still on, but the spread is likely to widen significantly short term. TCI comments arguing that ZC is now in breach of covenants, are in our view misplaced and strengthening the thesis that this deal is a rescue with the support of the French government and shall indicate that the deal will go through.
Nevertheless, the risk of seeing a price cut is now a potential scenario, which should weight on the spread. Such a scenario would mean that both the tender terms and merger terms would have to be renegotiated. We will give an update on the modality of such an adjustment later on today once we have consulted with our French legal counsels. The eventually of a price cut in our view strengthens the case for a successful outcome to the transaction as it would repel in a way TCI criticisms of overpaying.
Regarding Safran comments that this warning “are new Developments” we would argue that they are tactical in their nature, following the accusation by TCI Funds that Safran and Zodiac were acting in concert. Such a statement is in our view meant to show that there is no concerted action between the 2 parties when it comes to operations and management, thus silencing TCI remarks in that regard.
We think that Safran is still committed to the deal, and the rescue nature of the transaction is even more clear in our view, hence fully supported by Safran main shareholder the French Government. In that respect, we think the commitment to the deal is very strong, but a price cut is now a very likely scenario.