Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

After two years, it's finally happened, if in a contorted way.

On Tuesday, Schneider Electric SE agreed to merge its software operations with British rival Aveva Group Plc. For the French industrial giant, the tie-up will achieve a secondary aim: giving the unit a public listing.

Multiple Envy?
Schneider's price-earnings ratio trails that of Aveva
Source: Bloomberg
Note: BEst P/E Ratio for blended 12-month period

The market is, understandably, skeptical the corporate-finance contortions to make the deal happen will actually succeed.

Schneider has wanted to pull together its disparate software businesses into one publicly traded company with a single culture and a punchy valuation. It also coveted Aveva, a Cambridge, England-based company which shares some customers and has a complementary software offering.

The simple thing to do would have been to buy Aveva, merge its assets with Schneider's, and then return the enlarged business to the stock market.

Instead, Schneider is injecting its business into Aveva in return for a controlling stake, leaving the British company's listing intact. The French businesses become part of a single company with an established culture and shareholder base. 

Relative Value
Schneider's software businesses are being injected into a much smaller Aveva operation
Source: Company presentation
*Adj EBITA = earnings before amortization, share-based payments, gain/loss on FX contracts, exceptionals

The effect is the same as if it had bought Aveva, integrated it, and then spun off a minority holding. Doing it this way avoids the risk that British business's culture would get destroyed in a full blown takeover.

So much for the clever structure. The financials are trickier.

The assets Schneider is providing to the enlarged company -- among them the remnants of what used to be known as Invensys -- are valued at 1.7 billion pounds ($2.2 billion) under the terms of the deal. That puts them at a slight discount to Aveva's trailing 20 times Ebita multiple.

Based on that valuation, the new Aveva should be worth 2.8 billion pounds, adding the company's market value of 1.2 billion pounds before the deal and deducting 100 million pounds of cash that will be paid out to shareholders before it closes. In theory, the 60 percent stake Schneider will receive would be worth the same as what it's putting in: 1.7 billion pounds.

But the French group is additionally paying Aveva shareholders 550 million pounds of cash as compensation for taking control. Despite the deal having been in the works for more than two years, there are no quantified synergies to justify that to Schneider shareholders.

As for Aveva investors, their 40 percent stake in the enlarged company should be worth about 1.1 billion pounds. Add the 650 million pounds of cash they are getting out of the deal and that would imply a current market value of nearly 1.8 billion pounds. Even after Tuesday's 28 percent rise in the stock price, it's only got as far as 1.6 billion pounds.

Going Nowhere
Before today's news, the stock was little changed over the past five years
Source: Bloomberg

Why isn't the market more pleased? Maybe investors don't value Schneider's assets so highly, given they are less familiar and have lower margins. Or they dare not believe this deal will actually complete. Two previous false starts weigh heavily. The absence of quantified savings, and of a nominated CEO for the enlarged group, reinforce the impression of work-in-progress, despite there being a firm agreement.

Aveva shareholders may be miffed that they don't have a deal for the whole company and that, under this combination, there is now only one buyer for the remaining shares. If there really is a counter-bidder for the Cambridge company, this would be the moment to step forward.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net