Safran — Update 20 January 2017

Safran — Update 20 January 2017

Safran

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Safran

A merger written in the stars

Aerospace & defence

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20 January 2017

Price

€63.6

Market cap

€27bn

Share price graph

Share details

Code

SAF

Listing

Euronext Paris

Shares in issue

417m

Business description

Safran is an international high-technology group and tier 1 supplier of systems and equipment in its core markets of aerospace and defence. Its main activities are aero engines and aircraft equipment such as landing gear, wheels & brakes, avionics, nacelles and wiring harnesses. Zodiac adds aircraft interiors.

Bull

CFM International JV with GE of the US has 75% market share for narrow body aircraft engines.

Strong original equipment supply to airframers, notably Airbus and Boeing, boosted by Zodiac.

Potential for strong cash generation growth supports M&A and shareholder distribution growth.

Bear

Risk that management is distracted from the core business by the acquisition of Zodiac, or that the integration is not successful.

Management has a poor M&A track record.

Perception of substandard profitability in defence and aircraft equipment activities.

Analysts

Alexandra West

+44 (0)20 3077 5700

Andy Chambers

+44 (0)20 3681 2525

Safran has finally announced its intention to merge with Zodiac Aerospace. A cash tender offer at €29.47 per Zodiac share represents a premium of 24.5% to Wednesday’s closing price. This is a deal that has been on the cards for most of this decade and will create the world’s third-largest aerospace supplier after UTC and GE. Safran announced last year that it wanted to focus on its core business of civil aerospace, and merging with Zodiac is consistent with that. However, there is a risk that integrating such a large acquisition will be a distraction for management from its focus on ramping up output of its existing business.

Creating a new aerospace giant to rival US peers

This announcement ends nearly a decade of speculation about potential consolidation in the French aerospace and defence market. The merger of Safran and Zodiac Aerospace will create the world number three in aerospace with revenues of €21bn, balanced between propulsion and aircraft equipment, and in aircraft equipment alone it will be the number two player. The new Safran will look a lot like two divisions of the US firm United Technologies (UTC), with positions across the whole aircraft value chain and exposure to all key aircraft programmes.

The companies are currently at vastly different ends of the performance and quality spectrum. Safran is arguably a member of the aerospace elite. Its joint venture with GE, CFM International, produces the world’s best-selling jet engine for the Boeing 737 and Airbus A320. In 2016, CFM started producing the new LEAP engine, which will be used on the 737 MAX and A320neo, and China’s C919. The development of the engine has gone well so far, but Safran’s relatively new CEO Philippe Petitcolin has previously cited managing the production ramp-up as his biggest challenge. Zodiac, which supplies aircraft interiors, has issued a string of profit warnings over the past two years. It has repeatedly pledged, yet failed to fix recurring problems of seat production for the A350. Airbus has publicly accused Zodiac of being ‘in denial’ about the severity of the problems and has refused to work with the company on future projects. Safran’s management therefore faces a serious challenge to successfully integrate Zodiac, without distracting from the existing business.

Limited synergies, but potentially very well timed

Safran has stated that the €10bn deal will give double-digit EPS accretion in the first year. The €200m of expected synergies over three years are limited, at less than 1% of combined sales; however, Safran claims to be able to accelerate Zodiac’s operational recovery so this approach looks well timed. The merger process is likely to be lengthy due to regulatory processes although, when it completes (expected early 2018), the deal should enhance Safran’s already strong long-term prospects.

Consensus estimates

Year
end

Revenue
(€m)

EBIT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

17,414

2,432

3.55

1.38

17.9

2.2

12/16e

18,104

2,515

3.82

1.54

16.6

2.4

12/17e

17,651

2.501

3.92

1.62

16.2

2.5

Source: Bloomberg

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Disclaimer

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2017]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

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