Interactive Investor

Aveva takeover excites bulls

21st July 2015 12:57

Harriet Mann from interactive investor

Even before a shock profits warning in September, Aveva has been on the M&A radar. Now French conglomerate Schneider Electric has bought a majority stake in the engineering software designer, diluting the British firm's exposure to the oil industry and adding further strings to its bow. Analysts have worked out the sums overnight and most agree this is a good move, predicting further upside for the share price.

This Anglo-French deal certainly makes strategic sense. With no overlapping products, the marriage will widen Aveva's exposure to chemicals, food & beverage, mining, water and pharmaceuticals. But it's complicated and there is a lack of information on likely cost savings, which makes putting an accurate price tag on Aveva more difficult.

"The Aveva share price needs to reach about £28 in today's terms (i.e., including a special dividend of c.£10) for the deal to have not destroyed value for Schneider," reckons broker Jefferies. "To create value, i.e. for the 53.5% stake to be worth more than £1.3bn, then the Aveva share price really needs to exceed £30."

Jefferies thinks savings could result in 1% and 2% points of incremental revenue growth in 2016 and 2017, respectively, with "highly conservative" cost reduction forecasts of 2% and 4%. Ignoring synergies, underlying operating profit of the combined group could reach £137.8 million, representing a 24.4% margin on £564.5 million of sales.

If the deal goes through, the enlarged business must expand either its multiple and/or its operating profit "materially for the deal to stack up".

The deal was made public quite early, too, in an effort to avoid leaks during the due diligence process. It's not binding yet either, and there's no break fee.

This opens up the playing field to a potential bidding war, which could force Schneider to pay more than needed if it decides to buy-out the listed minority, RBC Capital has warned. Although the broker likes the deal, it questions the 42-48% premium being paid - their calculations - and wonders why Schneider did not buy Aveva outright.

Siemens could throw a spanner in the works as a "credible" rival bidder, reckons Jefferies. It's rolled-out Aveva's new E3D product and has executed heavy investment in design and product lifecycle management (PLM) software. But for Schneider, with a market capitalisation of around €38 billion and over 170,000 employees, this is not a large deal.

It will inject its industrial software business into Aveva - the majority of which came from its acquisition of Invensys completed early in 2014 - and pay the UK firm £550 million for almost half the business pre-merger. Aveva will issue 74 million shares to Schneider, worth £1.3 billion at Friday's closing price and 53.5% of the enlarged company. Aveva shareholders will receive the £550 million, worth 855p per share, plus anything left on the books when the deal closes. UBS reckons over 1,000p could be returned to shareholders with £120 million of net cash on the balance sheet.

Aveva's shares rocketed by a third to 2,344p after the news, to 12-month highs and currently trade at 2,281p. Jefferies reckons they are worth more.

"Aveva looks set to re-rate further, in our view. We maintain our Buy rating with an increased 2,580p price target, in turn based on our prospective M&A scenarios."

Analysts at UBS are even more bullish, concluding:

"Having used a SOTP [sum of the parts] including M&A scenarios to arrive at our 2,210p price target, we go back to a multiple-based approach. We regard Aveva's long-term 21x forward PE as likely too generous to use for Schneider's asset, but note its book value of $1.745 billion following the recent purchase of Invensys. Applying the 21x to Aveva's 2017E earnings, adding Schneider at book value (an implicit 19x) and taking account of cash returns gives a 2,600p price target. We retain a Buy rating."