French industrial giant Schneider Electric SE has a 59% stake in Aveva after injecting its own software division into the Cambridge-based company in 2017 and receiving shares in return. In that transaction, Aveva shareholders surrendered control. For this they were compensated with a special dividend.
Schneider is now moving to secure 100% ownership and last month made an offer for the minority holding valuing the company at £10.2 billion ($11.3 billion) including assumed net debt. This came as Aveva was reeling from a profit warning and the global tech rout. The stock was also suffering because the company is gradually switching from selling one-time licenses to multiyear subscriptions, which temporarily depresses revenue.
Aveva’s independent directors endorsed the £31-a-share bid, not least as the premium on offer — 41% above the undisturbed share price — is the seemingly handsome top-up you see from bidders who don’t already have influence. Absent a deal, Aveva shares might now have drifted lower still. So the premium embedded in the offer price could be viewed as having risen.
But premiums aren’t the only guide in deals, especially when the target is at a low ebb. The simple question for Aveva shareholders is whether the stock can reach the offer level in the foreseeable future under its own steam.
The terms value Aveva at around 33 times forward earnings — that’s in line with the average since Schneider took its stake. Relative to next-12-month earnings before interest, tax, depreciation and amortization, the valuation multiple is 24 times. Yet the average over the period is 26 times, as analysts at UBS Group AG point out.
Sure, the ratings of tech stocks continue to fall. But these are hardly compelling multiples on which to exit, especially as the reliability of subscription revenue should support Aveva’s future trading valuation.
The business looks promising. Many analysts are skeptical of Aveva’s aggressive growth targets for 2026, a doubt reinforced by the firm’s grim trading statement last month. The spread of forecasts for the business is wide. But on average estimates, free cash flow is expected to rise almost 90% between the current and 2026 financial years. Aveva only has to revisit where it was trading in January to match the offer price. With this trajectory, could that really take more than a couple of years?
Schneider, capitalized at 68 billion euros ($66 billion), can clearly afford to pay a price better reflecting the upside. A 10% bump would cost less than another £400 million for the minority holding. Small wonder that M&G Investments and Mawer Investment Management voiced their opposition the moment the deal was announced. Hedge fund Davidson Kempner Capital Management has amassed a stake and wants a sweetener, Bloomberg News reported last week. Together, these investors have 6% of the company. As currently structured, the deal fails if naysayers accumulate 10%.
This is a litmus test for expected future bids for UK companies at a historically vulnerable time. Pushback here has some additional benefit: making other opportunists think twice.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
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