Activism Spotlight: CIAM at Center of Zodiac's $10.5B Sale
by Ronald Orol
Zodiac has agreed to be acquired by Safran on the day of its annual meeting, suggesting that the company wanted to avoid releasing results of a vote on executive pay.
When engine maker Safran agreed to acquire Zodiac Aerospace last week in a deal valued at almost €10 billion ($10.5 billion), the transaction was announced on the day of the target company's annual meeting—one that looked like it was going to feature a significant negative vote of disgruntled shareholders.
The deal was struck on Thursday. On that day if no deal had been announced, the markets would have received the result of a "just vote no" proxy contest launched by newbie activist fund Charity Investment Asset Management, or CIAM. A Paris-based, five-year-old event-driven fund, CIAM adjusted its strategy about three years ago to include activism.
It's unclear what that vote would have looked like. However, Zodiac's move to reach a deal on the day of the meeting suggests that the company wanted to strike a deal as part of an effort to avoid the embarrassment of a large negative vote of outside investors on key proposals and directors.
CIAM, which hired proxy solicitor Georgeson for assistance, sought to drive shareholders to vote against three director candidates for the company's supervisory board. Also, CIAM's campaign also urged other investors to vote against three company proposals including so-called free performance shares offered to Zodiac's top executives that vested at a substantial discount to the share price at the time of being granted.
Anne-Sophie D'Andlau, a portfolio manager at CIAM, said that the fund and other shareholders were frustrated with Zodiac's performance, which included some profit warnings between 2014 and 2016.
CIAM started submitting letters to Zodiac's board in the fourth quarter of 2016, urging the company to improve its governance and consider strategic alternatives, such as a sale. However, it wasn't until mid-December, when Zodiac announced its top executive compensation resolutions and the renewal of directors for their upcoming annual meeting that CIAM decided to step up its campaign with a "just vote no" proxy contest, reaching out to a variety of investors including pension plans, index funds and traditional asset managers, to oppose the management's resolutions.
D'Andlau argued that Zodiac wasn't able to keep up with orders and had delays in supplying airline seats, which led to deeper problems and profit warnings. "We could see the whole aerospace component space was challenged because of the growth in airplane orders and that suppliers, in particular, Zodiac, were not able to keep up with the orders," she said.
Zodiac did not return a request for comment.
Also, D'Andlau said CIAM had concerns about the overinfluence of three families, who controlled a large Zodiac stake, on the company's board. The fund was hoping Zodiac would bring in new directors with aerospace sector and financial sector experience. According to a PowerPoint presentation submitted by CIAM, three Zodiac families, Domange, Marechal and Desanges, control 36.6% of the voting rights through a pact and four seats on an 11-person board.
As part of the deal, Safran will offer €29.47 per Zodiac share, a 26% premium to Zodiac's Wednesday closing price. Shareholders can choose between the cash offer (which carries a condition that at least 50% of the target's shareholders accept the bid), and a share offer with an exchange ratio of one Safran share for 2.062 of a Zodiac share, equating to €32.62 per share based on Safran's closing price on Wednesday.
However, D'Andlau said the structure of the offer isn't yet clear, adding that there is a concern that too many investors will choose the share offer if Safran's stock price spikes too much, leaving not enough investors to participate in the cash part of the offer. Nevertheless, she added that CIAM believes it is a fair offer from a financial point of view and that the sale was a key potential goal and represented the fund's exit strategy.
One adviser familiar with the situation said that activism brings attention to underperforming stocks, adding that the noise they create helps potential bidders form a view about whether they would like to acquire a targeted company.