Micro Focus spikes on news of HPE Software's wider margins

Ahead of the £6.6bn deal that will make it the UK's biggest software company, Micro Focus reported merger partner HPE Software's revenues were on the wane but margins were improving.

Because the merger, which is expected to close in the third quarter of next year, is classed as a reverse takeover due to HPE's larger size, the FTSE 100 company is obliged to report on the US company's results.

Hewlett Packard Enterprise reported that its software arm saw revenues slide 6% in the fourth quarter, which resulted in a 12% decline to $3.2bn in the year to end-October. This is more than two and a half the size of Micro Focus' sales last year.

Meanwhile, a widening of operating margins to 32.1% in the fourth quarter contributed to an increased annual operating profit of $749m for the full year, representing an improvement in operating margins to 23.4% from 21.8% the year before.

The largest revenue segment, support, fell 7% in the fourth quarter and 14% in the year, while licence revenue fell 5% in the fourth quarter and 12% for the year,.

Professional services revenue was down 6% and software-as-a-service revenue down 7%.

The merger between Micro Focus and HPE Software was agreed in September and includes a $400m return of value to the UK company's shareholders.

To fund the deal the UK company will pay $2.5bn in cash and issue $6.3bn of stock to the owners of Hewlett Packard Enterprise (HPE), which was spun out of its more famous hardware parent in October 2015, so that once the deal is complete, the US corporation's shareholders will own 50.1% of the enlarged entity.

Micro Focus will keep its London listing and management will retain their roles, with a number of the HPE software team joining and HPE appointing half of the non-execs to the enlarged board.

Micro Focus, which has got commitment for $5.5bn of debt financing, plans to return roughly $400m or $1.68 per share to it shareholders prior to completion, which it expects in the third quarter of 2017 after shareholder approval and a likely lengthy regulatory approval process.

Shares in Micro Focus rose 2% to 2,142p in the first few minutes of trading on Wednesday.