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A takeover bid for one of the UK’s few publicly traded software companies of any size is facing resistance. When stocks are falling everywhere, snubbing a cash offer is brave. But shareholders in Aveva Group Plc are justified in holding out. The situation is emblematic of the opportunistic bids we could see exploiting this year’s collapse in the pound and the vulnerability of certain UK stocks.
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.
—Bloomberg