Shares in industrial software firm AVEVA Group (LSE: AVV) rose by as much as 30% this morning, after the firm announced a major deal with French firm Schneider Electric.
What’s happened?
Aveva will acquire a selection of software assets from Schneider Electric, including the software assets formerly belonging to Invensys, the FTSE 250 firm acquired by Schneider in 2013. The assets will be acquired on a debt-free and cash-free basis.
The assets will be acquired on a debt-free and cash-free basis, but this isn’t a simple acquisition. On completion of the deal, Schneider will pay £550m in cash to Aveva and receive 74m new Aveva shares, giving Schneider a 53.5% majority stake in Aveva.
Aveva’s existing shareholders will share the £550m plus some of Aveva’s net cash, resulting in a whopping special dividend that I estimate at around £10 per share.
Why?
Aveva says the purpose of the deal is to create “a global leader in industrial software” with sufficient scale to play a leading role in key markets.
The resulting company will have a much larger and more comprehensive product portfolio of industrial software. Aveva specialises in asset management and operational management software for large engineering businesses, and says this deal will enhance its position in sectors including oil and gas, chemicals and pharmaceuticals.
Geographic coverage will also improve, with 36% of revenues now expected to come from the Americas, compared to just 18% for the current Aveva business.
Big rise in profits
The enlarged Aveva is expected to have annual revenue of £534m and adjusted earnings before interest, tax and amortisation (EBITA) of £130m. These figures are more than double those the firm reported last year, when sales totalled £208.7m and adjusted pre-tax profits were £62.1m.
However, shareholders need to consider that the firm’s share count will also rise sharply, climbing by 115% to 138m. My rough calculations suggest that last year’s adjusted earnings for the combined firm, using the figures provided by Aveva today, could be around 65-70p per share. At the current share price of 2,275p, this gives Aveva a trailing P/E of about 33.
Before today’s deal, Aveva traded on a trailing P/E of 24, so the market seems to be pricing in considerable new growth as a result of this deal.
Is Aveva a buy?
Once this deal completes, Schneider will have a 53.5% shareholding in Aveva. As a majority shareholder, Schneider will have a lot of influence over Aveva. For example, Schneider could choose to vote against Aveva’s dividend.
Schneider might also choose to sell Aveva to another owner, or to buy-out Aveva’s minority shareholders during a tough period. In such a scenario, Aveva’s share price could be much lower than it is today. This could force minority shareholders to sell for a loss, against their will.
Schneider has undertaken not to do anything of this kind for at least two years, but it does seem likely to me that the firm will eventually want to take full control of Aveva, or sell it.
Aveva shares don’t look cheap to me, either. Earnings per share have only risen by an average of 4.4% per year since 2010. Yet before today’s announcement, Aveva was trading on a demanding 2016 forecast P/E of 23.
Investors will have to decide for themselves whether they believe the new Aveva’s growth prospects are strong enough to justify a premium rating.
