Aveva rockets after Schneider takeover

After months of speculation, perennial bid favourite Aveva has fallen into the hands of Schneider Electric. In a complicated deal that's officially a reverse takeover, the British engineering software designer will buy Schneider's industrial software assets and the French giant will pay £550 million to Aveva. That means a potential windfall for Aveva shareholders, which is reflected in a surge in the share price Monday.

Aveva will issue about 74 million shares to Schneider, worth £1.3 billion at Friday's closing price and 53.5% of the enlarged company. And that £550 million of cash - worth 855p, and almost half the business pre-merger - will be returned to Aveva shareholders. Net excess cash will, too, and Numis Securities reckons they'll receive much more.

"The net effect of this, on our estimates, is that AVEVA shareholders will receive £10/share in cash, and retain their current number of shares in "new Aveva" which we project will have an FY17 EPS in line with our current forecasts, and FY18 EPS c. 10% ahead," writes analyst David Toms. "If the FY17 PE remains unchanged through the deal, then the value of the shareholding will be unchanged, and the £10/share cash will be incremental."

This is clearly a smart move by both companies, and effectively merges two great British businesses. Schneider's software business is made up largely of assets which came with Invensys, the UK industrial software firm it snapped up for £3.4 billion in 2013. Combined revenue is tipped to be about £534 million and adjusted operating profit £130 million - Schneider made £71 million profit on £331 million of sales last year.

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Aveva issued a shock profits warning last September, driven largely by the plunge in oil prices. The company makes about 45% of its money from energy companies, selling software used to design oil rigs and refineries. Work with South Korean shipyards, and ongoing political turmoil in Brazil hit the Latin American operations, too, and Aveva shares sank to a four-year low.

"By roughly doubling the scale of the group, Aveva is both building critical mass and diversifying away from the volatile and unpredictable segments of oil & gas and shipbuilding," writes Westhouse Securities analyst Gareth Evans. "These markets are highly lucrative when "in vogue" but adding in additional vertical segments, as well as new software products and distribution channels, Aveva is making a major strategic step forward."

Factoring such a deal into the current share price with any great accuracy is, however, proving less than straightforward. Aveva shares have traded as high at 2,344p and as low as 2,000p. The "right" price looks to be somewhere between 2,200p and 2,350p, for now.

And that'll put a smile on the face of those who invested in our Aggressive Summer Portfolio, one of Interactive Investor's bank of model portfolios. It entered the six-month seasonal portfolio at the beginning of May at 1,691p, and rumours that Schneider was sniffing around put a rocket under the shares almost immediately.

However, this not yet a binding deal, and some shareholders will be happy to take profits. Schneider will not be allowed to increase its stake in Aveva for two years either. But if this deal does happen - it's expected to be finalised by the end of 2015 - Investec Securities thinks the shares will be worth a lot more.

Following a conference call with Aveva management this morning - chairman Philip Aiken, chief executive Richard Longdon and finance boss James Kidd keep their jobs - Investec has upgraded Aveva from 'hold' to 'buy' and slapped a 2,600p price target on the shares.

"Assuming 15% of pro forma profit uplift from cost savings / revenue synergies, a tax rate of 25% gives EPS of c.80p," explains the broker. "On a software sector multiple of 20x, this gets to 1625p. Cash being returned will be 8.55p from Schneider and we assume half of AVEVA's cash balance will be returned, which takes overall return to c.950p. Together, this gets to a share price of c.2600p."