Aveva tries again with new Schneider Electric software merger deal
Industrial software specialist Aveva Group has agreed a £3bn merger with the software arm of France's Schneider Electric where the UK company's existing shareholders will own 40% of the business.
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As part of the deal, which is being structured as a reverse takeover akin to merger agreements that were aborted in 2015 and 2016, Schneider Electric will contribute £550m of cash, which together with £100m of excess cash on Aveva's balance sheet, will be paid out to existing shareholders of the FTSE 250 company at completion, representing a total of roughly 1,014p per share.
The deal is similar to the failed proposal from July 2015, except that this is an agreed deal rather than a preliminary discussion and with Schneider owning 60% of the group rather than the 53.5% proposed last time and the French group adding its Telvent oil and gas business.
With a full prospectus to be published on Wednesday, Aveva said value of the 97.4m shares to be issued to Schneider Electric is approximately £1.7bn based on its closing share price on Monday.
The merger, which will be put to a shareholder vote on 29 September and expected to complete at or around the end of 2017, will create a company with combined revenues of close to £658m and adjusted operating profits of almost £146m in the current year and enhancing Aveva's position in oil & gas, power and marine as well as adding positions in chemicals, food & beverage, pharmaceuticals, mining, water.
Revenue synergies and cost savings are expected to be "material" over the medium term.
"The transaction will be transformational to Aveva, creating a global leader in industrial software, which will be able to better compete on a global scale," said chairman Philip Aiken.
"Aveva will significantly expand its scale and product portfolio, increase its capabilities in the owner operator market, diversify its end user markets and increase its geographic exposure to the North American market, in line with our strategic goals.
"The transaction is expected to provide significant value to our shareholders via the upfront cash payment and a significant ongoing holding in the enlarged Aveva Group, which will benefit from synergies and a compelling equity story underpinned by an enhanced strategic positioning."
A new chief executive officer has not yet been decided but James Kidd, who only started in January, will continue in his role as CEO until an appointment is made, whereupon he will be appointed to the role of deputy CEO and chief financial officer.
Schneider Electric's current deputy CEO and CFO Emmanuel Babeau and executive vice president Peter Herweck will be appointed as non-executive directors of the enlarged group on completion.
The announcement from Aveva also contains positive commentary around current trading, indicating a "solid" start to the 2018 financial year, with constant currency revenue in the first four months slightly ahead of last year.
Shares in Aveva rocketed 24% in the first hour of trading on Tuesday.
Aveva's house broker Numis said the deal is "broadly neutral" for earnings per share, being around 2% dilutive in the 2019 financial year and 1% accretive the year after with only £5/10m synergies assumed respectively.
Numis noted that, assuming completion, the enlarged £3bn company will be listed in London, with Schneider making a 858p per share cash payment to Aveva holders in exchange for a 60% stake and control, with the UK company issuing 97m
additional shares versus 64m currently in issue.
"This shareholding ratio is approximately proportional to the profit contributions from the respective businesses."
Analyst Julian Yates at Investec said the deal looked "sensible considering the strategic challenges Aveva faces on a standalone basis", with his initial scenario seeing upside to circa 2,600p.
With Schneider issuing circa 90-95m shares versus 74m in the 2015 proposal, this means slightly less accretion than on previous terms.
Completion looks more certain, Yates added: "With the prospectus due to be published tomorrow, clearly significant preparatory work has been completed, which was not the case before at the time of the previous early announcement, with the carve-out of the Schneider business a complex exercise. In absence of any bids being made by other potential suiters over the last couple of years, this seems like the best option for Aveva shareholders to help overcome the strategic growth challenges of being largely focused on the oil and gas market."
RBC Capital Markets said the transaction multiples "appear rich", based on the valuation of Schneider’s software business of £1.7bn plus the additional £550m payment, means Schneider is ‘paying’ £2.25bn for 60% of a combined entity, or 25.7 times trailing EBITA, but analysts at the bank see "considerable strategic logic to the deal".
Jefferies was more of a dissenting voice, calling it an "unappealing" deal for Schneider, with a rationale that "looks reasonable but the details are less convincing" as the deal reduces adjusted EBITA by €3m and as Aveva's "recent record is poor", with profits well off their peak and growth minimal, and the deal increasing Schneider's exposure to oil & gas.