Professional Documents
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Summary
The shareholder vote on the merger should take place before the takeover
Corporate governance at Safran is flawed and will be even worse after the merger
Safran shareholders should vote against the merger to secure strong corporate governance
A share buyback is better for Safran and better for its shareholders
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Safran
Safran has a terrible history of executing and Results in a very high level of debt
integrating takeovers
Zodiacs founding families, the Peugeot family, Fonds Strategique and the French State will sign a shareholders
agreement that, together with employees, will give them effective control of Safran
-3-
Safran
1. Entering some new areas in aerospace: diversification into a poor business weakens Safran
3. Financial discipline: Safran is massively overpaying and giving away cheap Safran stock
5. "Create a global aerospace leader: this is good for the French state but not for public shareholders
-4-
Safran
Reported margin 5%
Sourc e: T CI analysis
-5-
Safran
0%
There is huge execution risk
-1 %
-5%
2012 2013 2014 2015 2016 2017 2018 2019
Sourc e: T CI analysis, as sumes 5 1% tender acceptance, margin rec overy includes s ynergies
-6-
Safran
Return on Investment 2% 4% 6%
-7-
Safran
Change in the business model to Supplier Furnished Equipment (SFE) will significantly increase pricing pressure
-8-
Safran
Safran has a far superior business. Dilution of high quality Propulsion business.
Defence 4% Defence 5%
Zodiac
Interiors 15%
Equipment 26%
Propulsion 46%
% of Zodiac 2019 (E)
profits Aero Systems 9% revenues
2015
Propulsion 70%
Equipment 25%
Sourc e: T CI analysis
-9-
Safran
Safrans reported earnings do not reflect its true earnings power (due to current hedge rate of $1.24/)
Revenue 17,500m
Safran EV/EBIT 9x
Safran PE 12x
-10-
Safran
Safrans financial position will be significantly weaker after merging with Zodiac
Net cash position post sale of Security Net debt after Zodiac deal
Guidance: 2.5x debt/EBITDA
1 1
0 0
-1 -1
-2 -2
bn
bn
-3 -3
-4 -4
-5 -5
-6 -6
-7 -7
7bn net debt
-8 -8
Sourc e: T CI analysis
-11-
Safran
Zodiac reference
shareholders 10%
Public 75% Public 67%
Sourc e: T CI analysis
-12-
Safran
The principal shareholders are dividing the board seats of the merged company amongst each other
Public shareholders currently own 75% of the capital but post-merger will have only 30% of the board seats
French state 3 18 4 20
Employees 5 29 4 20
Independent 7 41 6 30
17 20
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Safran
Safran
Corporate governance at Safran is flawed
Double voting means the French state and employees control almost 40% of the votes
The Florange Law has produced a governance structure that lacks proper accountability and responsibility
Employees 11%
Capital Voting
structure rights
Employees 16%
Public 75%
Public 62%
Sourc e: T CI analysis
-14-
Safran
The merger is a cynical attempt by the principal shareholders to take control of the company
The deal will dilute the capital, votes and board seats of public shareholders
Public shareholders will be vulnerable to further abuse if the merger goes ahead
Sourc e: T CI analysis
-15-
Safran
TCI, a long term shareholder of Volkswagen (VW), has been actively trying to improve the corporate governance at
VW (see the website www.TCIVWengagement.com)
Employees/unions 4 Employees/unions 10
Independent 6 Independent 1
Sourc e: T CI analysis
-16-
Safran
Public shareholders 75 62
o/w unidentified 5 4
Sourc e: T CI analysis
-17-
Safran
60
50
30
20
Feb 2012
TCI initiates position at 25
10
2012 2013 2014 2015 2016 2017
-18-
Safran
Subsequently Safran:
1. Sold its Security business for a good price
2. Sold its stake in Ingenico. The final 5%
stake was sold for 110 vs. the current Ingenico
share price of 78
-19-
Safran
1. Should not make a bid for Zodiac, a company of lower overall quality than Safran. This deal has
questionable strategic rationale and limited synergic benefits. We oppose any new attempt to
take over Zodiac.making engines is a far superior business to making seats.
2. Increase the dividend payout ratio to 50% of profits. Safran has strong cashflow characteristics so this is
easily affordable. There would still be more than enough retained capital for reinvestment and R&D.
3. Not use the companys shares for any future transaction as long as they remain at such a depressed
valuation. At current prices buying back the companys shares would be, by far, the best
investment that Safran could make.
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Safran
65
55
Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17
Sourc e: Bloomberg
-21-
Safran
Zodiac public shareholders are not being given the proper information they require before making a decision
(they could receive cash, Safran shares or they could end up owning a hugely devalued minority stake in
Zodiac)
Zodiac reference shareholders are being given a preferential deal to avoid paying tax
It is in the interests of all shareholders that the vote on the merger happens before the takeover
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Safran
Alternative strategy
Giving away undervalued Safran stock for expensive Zodiac stock is hugely value destructive for Safran
-23-
Safran
EPS accretion dependent on a highly uncertain and Double digit EPS accretion guaranteed.
optimistic turnaround of Zodiacs Interiors business.
5%
0%
-1 %
-5%
2012 2013 2014 2015 2016 2017 2018 2019
Sourc e: T CI analysis, as sumes 5 1% tender acceptance, margin rec overy includes s ynergies
-24-
Safran
Results in a very high level of debt: Safran would have zero debt
Leverage guidance = 2.5x EV/EBITDA 2bn in cash plus over 1bn of FCF pa
Debt = 7bn
Lower FCF conversion due to high levels of capex FCF/Net income conversion would be approx. 100%
at Zodiac
Future cashflow will be used to pay down debt Future cashflow could be used for:
1. More R&D
Dividend payout ratio capped at 40% 2. Investing in new products
3. Higher dividends; the payout ratio could be
raised to 50-60%
Sourc e: T CI analysis
-25-
Safran
Exposure to contingent liabilities Zero exposure to Zodiacs troubled seats and cabins
business and potential associated liabilities
Zodiac is exposed to unquantifiable penalties for
late deliveries and future claims for potentially
defective seats and cabins
Sourc e: T CI analysis
-26-
Safran
The takeover will be massively value destructive A share buyback would be massively value enhancing
It only covers Safrans cost of capital under highly Safran stock is hugely undervalued (12x adjusted
optimistic scenarios earnings)
Sourc e: T CI analysis
-27-
Safran
Summary
Buying Zodiac will significantly dilute the quality of Safran would remain focused on the high quality
Safrans business Aerospace Propulsion business
The takeover will be hugely value destructive The buyback would be massively value enhancing
Sourc e: T CI analysis
-28-
Safran
100
56%
upside
75
17%
64 upside
Sourc e: T CI analysis
-29-
Safran
Conclusion
Corporate governance at Safran is flawed and will be even worse after the merger
Shareholders should vote against the merger (only 33.4% of the votes needed to block it)
Safrans stock price is significantly undervalued so a share buyback would be hugely value accretive
TCI will be voting against the merger and proposing a 3bn share buyback
-30-
Appendix
Safrans stand-alone growth prospects are very strong
Safran
The aerospace engine
business is the best
CEO
business in the world.
-32-
Safran
Safrans Propulsion business has over 80% share of the narrow body market
8,000
Engines in fleet
6,000
CFM
4,000
2,000
0
Boeing 737 Family Airbus A320 Family
CFM IAE
Sourc e: A scend
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Safran
CFM fleet in service to grow by 4%+ annually over CFM fleet in service
the next decade 40,000
Number of engines
20,000
10,000
2018(E)
2021(E)
1982
1985
2000
2003
2024(E)
1988
1991
1994
1997
2006
2009
2012
2015
CFM56 LEAP
Sourc e: T CI analysis
-34-
Safran
CFM deliveries
All of these engines not making profits yet
1,800
1,600
1,400
Number of engines
1,200
1,000
800
600
400
200
0
1989
1990
1994
1998
1999
2003
2007
2008
2012
1988
1991
1992
1993
1995
1996
1997
2000
2001
2002
2004
2005
2006
2009
2010
2011
2013
2014
2015
pre-1988
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Safran
Maximum shop visit activity on CFM56 Worldwide CFM fleet shop visits
around 2025 4,000
Number of visits
2,000
1,000
2022(E)
2023(E)
2024(E)
2025(E)
2016(E)
2017(E)
2018(E)
2019(E)
2020(E)
2021(E)
2012
2013
2014
2015
CFM56 LEAP
Sourc e: T CI analysis
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Safran
1,400
1,200
1,000
800
600
400
200
2019(E)
2016(E)
2017(E)
2018(E)
2020(E)
1985
1988
1992
1995
1998
2002
2005
2008
2012
2015
1986
1987
1989
1990
1991
1993
1994
1996
1997
1999
2000
2001
2003
2004
2006
2007
2009
2010
2011
2013
2014
Sourc e: A scend, Bernstein analysis
-37-
Safran
2x 3x
2007
2016
2019
2028
2010
2013
2022
2025
Sourc e: Safran SA
-38-
Safran
LEAP (Safran)
5,217 aircraft
C919
MC-21
A320neo 1,264 aircraft (45% market share)
Sourc e: Safran SA
-39-
Safran
25%
23%
21%
19%
17%
15%
13%
11%
9%
7%
5%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Sourc e: T CI analysis
-40-
Safran
#1 worldwide #1 worldwide
for carbon brakes for civil aircraft
Sales Sales
99% aftermarket share 43% aftermarket
Generally dual sourced 57% OE
Sourc e: Safran SA
-41-
Safran
200
150
2025(E)
2014
2014
Sourc e: Safran SA
-42-
Safran
Margins at other divisions forecast to grow 1% p.a. for the next 5 years
15% 15%
10% 10%
5% 5%
0% 0%
2016(E)
2017(E)
2018(E)
2019(E)
2020(E)
2016(E)
2017(E)
2018(E)
2019(E)
2020(E)
2015
2015
Sourc e: Safran SA
-43-
Safran
4,000
3,500
3,000
2,500
m
2,000
1,500
1,000
500
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-44-
Safran
1,000
800
600
m
400
200
2019(E)
2020(E)
2016(E)
2017(E)
2018(E)
2015
Sourc e: Safran SA
-45-
Safran
2,000 2,100m
1,500 1,356m
m
1,000
500 495m
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(E) 2017(E) 2018(E) 2019(E) 2020(E)
Sourc e: Safran SA
-46-
Safran
1.38
1.20
1.12
0.96
0.62
0.50
0.38
Sourc e: Safran SA
-47-
Safran
35%
30%
30%
27%
25%
French government stake
22%
20% 18%
15%
15% 14%
10%
5%
0%
Mar-15
Mar-13
Jan-13
Nov-13
Nov-15
Nov-16
Sale proceeds ($m) 600 1,200 1,200 800 350
Price () 35 46 63 69 63
Sourc e: Bloomberg
-48-
Disclaimer
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