Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Politics and meanness are undermining an attempt to create a new French aerospace champion. Safran SA's 9.7 billion euro ($10.3 billion) offer for industry supplier Zodiac Aerospace is structured in a way that threatens to give the state a better deal than ordinary shareholders.

Safran has secured the agreement of Zodiac's board for a deal that's been circling for months. The structure seems to have been determined to please a handful of dominant Zodiac shareholders, including the government, which wants to stay invested in the combined company. So Safran intends to pay them in its own shares while buying out everyone else for cash.

This shouldn't be too hard a problem. Safran could give shareholders a choice of taking either its shares or cash, with the cash offer being more generous. That way, most independent investors would probably choose the higher and more certain value of the cash offer, leaving the core shareholders to take the stock alternative. That's what Anheuser-Busch InBev SA/NV did in its first offer for rival brewer SABMiller Plc when faced with a similar issue.

But Safran isn't going down this route. Instead it's using strong-arm tactics to make its independent shareholders play ball.

While there are separate cash and share offers, the share offer could become the more generous of the two. Based on Safran's closing share price just before the deal was announced, it was worth slightly more than the cash offer. A slight fall in Safran's share price on Thursday has put it below the cash alternative for now. But a greater premium could easily return to the share-based offer over the coming year, if Safran shares pick up. Completion isn't scheduled till early 2018.

Altitude Sickness
Zodiac has agreed to a takeover by Safran at a deal well below its shares' five-year high
Source: Bloomberg

Now to the coercion. The tasty share offer will be made only if at least 50 percent of Zodiac's shares are first tendered to the cash offer. The group of big investors has already said it won't subscribe for that. So about 75 percent of the rest have to accept the cash offer to get any deal at all.

It's not a great choice. If all independent shareholders snub the cash offer in the hope of taking the potentially more valuable share offer, the hurdle won't be passed and Zodiac shares risk falling back to their pre-deal 23.31 euro level. They were trading at 28.40 euros after the tie-up was announced.

Shareholders who value the principle of equal and fair treatment and don't want to be pushed around will consider that a risk worth taking. After all, independent investors in Sika AG have fought valiantly against being disadvantaged relative to family shareholders in Compagnie de Saint-Gobain's attempted takeover of the Swiss chemicals group.

Formation Flying
Shares in Safran and Zodiac had hugged their peers prior to unveiling their tie-up
Source: Bloomberg

Safran could afford to be more generous. It has excess cash, which it's planning to pay out in a special dividend to its own shareholders. That could go into the deal instead. What's more, Safran sees the acquisition covering its cost of capital within just three years, based on the expected cost cuts. It reckons those savings are conservative so it could probably have afforded to pay more.

Zodiac's board has capitulated to this deal even though it blatantly treats some investors better than others. But independent shareholders don't have to roll over too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects value of share-based alternative as of today in fifth paragraph.)

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net