Attempting a big acquisition can be a risky bet during stable times. It’s even more challenging during a pandemic.
(ticker: AV:U.K.) did exactly that in August, when it bought OSlsoft, the U.S. industrial software maker that is 45% owned by Japanese tech investor SoftBank, for $5 billion including debt.
The combined group, which will have annual revenue of 1.2 billion pounds sterling ($1.5 billion), with adjusted earnings before interest and taxes estimated to be about £330 million, will transform U.K.-listed Aveva into a global industrial software player. That gives the stock room to grow.
One of the U.K.’s oldest technology companies, Aveva began life at the University of Cambridge as a government-funded research institute, producing software used to design and manage oil rigs, ships, and chemical plants. It listed on the London Stock Exchange in 1996, and five years later changed its name to Aveva.
The company has expanded through a series of deals, including a £3 billion merger with the industrial-software business of France’s
in 2018, and now commands a market valuation of almost £8 billion. “We think an uplift in market cap should make the equity more attractive to non-U.K. investors,” analysts at Bank of America Merrill Lynch said.
Demand for Aveva’s software—which is used, for example, by New Belgium Brewing to increase packaging production capacity and decrease downtime of the plant—has been robust despite coronavirus-related disruption. Aveva reported an 8.8% rise in revenue to £833.8 million in the 12 months to the end of March 2020, and analysts expect the company to reach revenue of £929 million in the year ending March 2023, according to the FactSet consensus.
Buying OSIsoft gives Aveva access to the San Leandro, Calif.–based company’s PI Software platform to help customers manage their data and data-analytics software to boost the performance of big industrial plants and processes.
“As we considered the acquisition of OSIsoft, we were mindful of the superb fit of our combined businesses and effects the transaction would have in strengthening our leading role in accelerating the digitalization of the industrial world,” says
, chief executive officer of Aveva.
Shareholders seem to like the strategic rationale of the deal. Aveva’s stock has risen 17% since it was announced on Aug. 25, even though a rights issue will provide the bulk of the acquisition financing. Shares are up about 4% to 4,842 pence ($62.50).
The shares trade at a forward consensus price/earning ratio of 43.9 times, according to FactSet, which is high compared to where it has tended to trade in recent years. “However, Aveva’s peer group is similarly richly valued,” analysts at UBS say. These include
UBS sees potential for increased cross-selling to customers of both companies, including Johnson & Johnson, ExxonMobil, Microsoft, and Duke Energy. Meanwhile, the OSIsoft acquisition will reduce Aveva’s exposure to oil and gas—its second-largest market—from 40% to 35%, according to UBS.
Aveva is planning to finance the bulk of the deal with a $3.5 billion rights issue set to be launched in the next few weeks, as well as $900 million from existing cash and some new debt. It will also issue $600 million of new shares to OSIsoft’s largest shareholder, a holding company owned by the company’s founder, J. Patrick Kennedy. Shareholders can take comfort in the fact that Schneider Electric, which owns 60% of Aveva’s stock, has committed to take up its portion of the cash call.
“We are very comfortable with the level of debt to support the acquisition of OSIsoft, which amounts to $900 million and under two-times pro forma Ebitda (earnings before interest, taxes, depreciation, and amortization). The servicing and paying down of that debt will be based on the strong recurring revenue streams, margin, and cash-generation profiles of the combined businesses,” Hayman says.
Aveva hasn’t given a target for cost savings yet, but expects them to be “material,” and the group’s track record on M&A bodes well. Its integration of Schneider Electric went smoothly, even though Aveva had to extract the business out of the French parent company, which was more complicated than buying a whole company, as with OSIsoft. At the time of the deal, it had forecast synergies of £25 million over two and half years and eventually achieved synergies of £33 million.
“While significant upside probably hinges on delivering revenue synergies, management has done this once before and the industry backdrop—powered by Industry 4.0 and IIoT [Industrial Internet of Things]—is arguably more supportive than ever,” analysts at Bank of America Merrill Lynch noted.
Aveva looks set to repeat the trick with OSIsoft, with investors reaping the rewards.
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