Safran: Acquisition of Collins Potentially Strengthens Safran’s Moat at a Fair Price

Safran SAF announced the acquisition of Collins’ actuation and flight control systems business for $1.8 billion in an all-cash deal, expected to be completed in 2024. We believe the strategic fit of the acquisition is strong and moat-accretive, and the valuation appears fair in our view. Our EUR 160 fair value estimate and wide moat rating are unchanged.

We believe the acquisition has the potential to strengthen Safran’s narrow moat for equipment by delivering commercial synergies in the form of product integration, and creating a stickier aircraft product offering as most of the system offering relates to hardware components.

The acquisition price of $1.8 billion represents a multiple of about 14 times EBITDA 2024 presynergies and about 10 times EBITDA 2024 postsynergies. Honeywell, the closest comparable, trades at 17.4 times enterprise/EBITDA and 15.9 times EV/forward EBITDA.

We forecast Safran will generate about EUR 3 billion in free cash flow in 2024, driven by its completion of the ramp-up phase, pent-up demand from the aftermarket, and recovery in narrow-body engine flying hours. Given the comparatively small size of the acquisition, we believe the firm can accommodate the purchase without compromising its capital allocation targets for organic growth and shareholder remuneration.

Collins’ portfolio is well balanced between commercial and military segments, and MRO contributes 40% of the sales, similar to Safran’s equipment business. The division is projected to generate $1.5 billion in sales and a 9% EBITDA margin in 2024, slightly lower than the 10% EBITDA margin in 2019 as the sector hasn’t fully recovered to pre-COVID levels. The dilution effect from business integration in the short term is marginal and Safran management reaffirmed 15%-18% EBITDA targets for 2025. Management identified cost synergies of about $50 million that should be achieved by 2028 and will bring the Collins division’s margins in line with the midteens range of Safran’s equipment unit.