This document discusses the potential acquisition of STS Ansaldo by Hitachi from Finmeccanica in 2015. It summarizes the key terms of the initial acquisition, complaints from minority shareholders about underpayment for STS Ansaldo, and analysis of the valuation and potential for the share price to increase after March 2018 if Hitachi is required to pay a higher price.

1. STS Ansaldo
Great risk / reward
Possible catalyst after March 2018
14E target (27% upside)
September 2017
Mathias Lascar
mlascar@makorsecurities.com
++ 44 207 290 57 97

2. In a nutshell
• Hitachi bought from Finmeccanica in Feb 2015 40% in STS on one side and
Breda on the other (unlisted), simultanously
• Minorities estimated Hitachi and Finmecanica colluded in underpaying STS and
overpaying Breda.
• Hitachi bought 40% of Ansaldo to Finmeccanica at 9,50E in Feb 2015 and
launched a mandatory.
• Consob validated minoriy minorities’ point (price to be paid by Hitachi was increased
to 9,899E
• Eventually, Hitachi paid 10,50E in the market to secure 50,77% of STS (in March 16)
• Since takeover bid, Hitachi pretty quiet
• No integration work has been done with Hitachi rail
• No dividend has been paid in 2017

3. In a nutshell (2)
• If Hitachi pays more than 10,50E before March 2018, it’ll need to
compensate 19,7m shares the difference between 10,50 and the
higher price paid
• So we think things could move after March 2018
• Amber Capital estimates STS worth 14E / Elliott 15E (Elliott has 20%)
• On 4/7/2016, Elliott said it filed a request with Administrative Tribunal to
cancel Consob clearance of deal arguing that minorities should have received
a 15E proposal
• We think an agreement between Hitachi and these noisy minorities needs to be
found before judgement
• Sector consolidation on its way / since March 16 peers are up 4% to
49%

4. First Deal Terms – Feb 2015
• Hitachi signed agreements to acquire 40% of STS Ansaldo from
Finmeccanica (renamed Leonardo in April 2016)
• The purchase of STS was conditional on buying also Ansaldo Breda, as
a « package deal ».
• Hitachi paid Finmeccanica:
• 9,50€ per STS Ansaldo share, resulting in a total consideration of EUR 761
million
• And EUR 36 million for Ansaldo Breda
• The acquisition closed on November 2015
• Due to the Italian law, Hitachi had to launch a Mandatory
Tender offer on the remaining 60% of STS Ansaldo.

5. Minority complaint
• On November 2015, two shareholders of STS (Amber Capital and Bluebell Partners)
separately filed with CONSOB a request to open an investigation on the purchase price of
STS and Breda’s activities:
• They estimated Breda sale price was artificially increased and STS artificially decreased.
• On February 2016, CONSOB found Hitachi and Finmeccanica guilty of collusion to artficially
overprice Breda and underprice STS.
• Consob required Hitachi to increase the price of the takeover bid by 0,399E per share to 9,899E per STS
share.
• On April 2016, Eliott appealed the decision of CONSOB and requested 15E per STS share
(Amber has been requesting 14E per share),
• The Mandatory offer closed on March 2016 and Hitachi was only able to acquire 6,42% STS
shares achieving 46,48% of STS in total.
• Today, Hitachi’s stake stands at 50,88% and the lastest price paid by Hitachi was 10,50E per
share

6. Valuation of Breda
• Various equity research analysts were
attributing a negative EV to Breda, in the range
of -EUR 250 million to -EUR 500 million
• Initially, Breda was valued +32ME in the packaged
transaction STS + Breda
• Hitachi board presentation mentionned in 2014
that an acquisition of STS Ansaldo without
Breda only would be around 12E
• Breda’s implied negative value therefore of -550mE

7. Valuation of STS bid: low …
• The price paid of EUR 761 million for STS correspond of a
valuation @ 1,3x EV/Sales and 12,6x EV/EBIT.
• Past transactions:
• Invensys Signalling was bought by Siemens for 2,4x Sales and 16,1x
EBIT
• Wabtec bought Faiveley for 1,39x sales and 13,7x EBIT

8. Hitachi’s 2 years « waiting period »
• On March 2016, Hitachi announced that they acquired 6m of
STS shares @ 10,50E and paid to the subscribers to the Offer
an adjustment of 0,82E for each share tendered in the offer.
• Hitachi also announced that during two years if they buy or
sell STS shares at a price higher than 10,50E per share,
Hitachi will have to pay a potential adjustement to the
subscribers of the Offer.
• http://www.ansaldo-sts.com/sites/ansaldosts.message-
asp.com/files/imce/notice_on_price_adjustment.pdf

9. Valuation and peers comparison
Peers Perf since March 2016 EV/EBIT EV/SALES
WAB US 4% 20,3 2,5
CAF SM 29% 14,8 1,1
TLGO SM 11% 11,7 1,8
ALO FP 49% 19,7 0,97
• Our view on STS Ansaldo present value:
• What did the peers do since March 2016 ?
Complilation of price target
2017 EBIT x 14 15 16 17 18
EBIT 2017 high guidance 142,10 142,10 142,10 142,10 142,10
EV implied 1989 2132 2274 2416 2558
Mket Cap 2024,40 2166,50 2308,60 2450,70 2592,80
Equity value 10,12 10,83 11,54 12,25 12,96
% upside -8,0% -1,5% 4,9% 11,4% 17,9%
Complilation of price target
2017 EBIT x 14 15 16 17 18
EBIT 2017 low guidance 126,90 126,90 126,90 126,90 126,90
EV implied 1777 1904 2030 2157 2284
Mket Cap 1811,60 1938,50 2065,40 2192,30 2319,20
Equity value 9,06 9,69 10,33 10,96 11,60
% upside -17,7% -11,9% -6,1% -0,3% 5,4%

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