By Sonia Andrzejuk, Argyro Charizona, Vlad Marcu, and Mikolaj Borowiak (Bocconi), Ross Barrett, Tigran Minasian, Jian Wee Soh, and Yagnesh Patel (Imperial College London)
Photo: Mohammad Rahmani (Unsplash)
Overview of the deal
Acquirer: Schneider Electric SE (PAR: SU)
Target: AVEVA Group PLC
Final Target Valuation: $10.8bn
Total Transaction Size: $4.4bn (remaining 40% of the business)
Closed date: TBC, expected to complete Q1 2023
Target advisors: Lazard & Co, JP Morgan, Numis Securities
Acquirer advisor: Citigroup
French industrial group Schneider will acquire all remaining shares (c.40%) of British industrial software company AVEVA, for $4.4bn. The deal values the whole business at around $10.8bn and concludes the nearly 7 year saga of the French company attempting to acquire AVEVA, having originally attempted to acquire the latter in 2015, and in 2016, both attempts of which failed. It was only in 2017 where a deal was finally struck, with Schneider coming to own c.60% of AVEVA in a $3.4bn reverse takeover. Recognising the strong foundations and expertise of AVEVA, Schneider Electric will seek to continue to build upon AVEVA’s legacy by continuing to support their strategic growth in transitioning to a subscription and cloud-based industrial SaaS model while maintaining AVEVA’s core business principles, preserving its business autonomy, standalone global operations, and headquarters.
By taking 100 per cent ownership of AVEVA, Schneider will be able to grow the business faster by simplifying decision-making, enabling efficient interactions between teams, accelerating investments in R&D, enabling a more coordinated sales strategy, and leveraging each companies’ particular strengths. The combination of AVEVA’s data platform and specialised applications with Schneider Electric’s energy expertise seeks to offer customers tangible gains in all aspects of safety, reliability, efficiency and sustainability.
“Since Schneider Electric and AVEVA agreed to combine our software businesses five years ago, we have recognised the growing opportunity for our technology to address three of the highest priorities of our industrial customers today: full digitisation, energy security and efficiency and sustainability.” - (Jean-Pascal Tricoire, CEO of Schneider Electric )
Company Details (Acquirer - Schneider Electric)
Schneider Electric S.E. is a French industrial conglomerate that provides energy and industrial automation digital solutions worldwide. With a core focus of accelerating the path to net zero CO2 emissions for both customers and partners, Schneider Electric aims to integrate world-leading processes and energy technologies together to realise the full efficiency and sustainability opportunities in businesses through the increased usage of digitalisation and electrification. Having a strong financial performance in 2021 where their revenue grew 14.9% to an all time high of EUR 28.9 billion, Schneider Electric aims to grow its top line by 7 to 9% in 2022 and aims to achieve 9 to 13% of organic growth in its adjusted EBITDA. The deal will allow Schneider Electric to combine energy as well as process data and software while accelerating AVEVA’s transition to a hybrid cloud-based subscription model, altogether bringing a "holistic approach to digitization".
Founded in 1836, headquartered in Rueil-Malmaison, France
CEO: Jean-Pascal Tricoire
Number of employees: 166,025 (in 2021)
Market Cap: $ 74.3bn (as of 9/11/2022)
LTM Revenue: $31.45bn
LTM EBITDA: $5.85bn
LTM EV/Revenue: 2.8x
LTM EV/EBITDA: 14.0x
Company Details (Target - AVEVA Group PLC)
AVEVA Group plc is a British multinational information technology consulting company headquartered in Cambridge, England. It is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index. The company started as the Computer-Aided Design Centre (or CADCentre) which was created in Cambridge in 1967 by the UK Ministry of Technology and Cambridge University. Aveva agreed to a takeover by its major shareholder Schneider Electric SE, a French energy management and automation group, in September, valuing Aveva at $10.8bn. The deal has its merits, but ‘the price is high for a company that it already controlled’, Deutsche Bank’s Head of European Capital Goods Gael de-Bray said in a research note.
Founded in 1967, headquartered in Cambridge, England, UK
CEO: Peter Herweck
Number of employees: 6,500
Market Cap: $9.6bn (as of 12/11/2022)
LTM Revenue: $1.26bn
LTM EBITDA: $247mn
LTM EV/Revenue: 8.1x
LTM EV/EBITDA: 41.3x
Projections and Assumptions
The acquisition aims to expand Schneider Electric's R&D presence and transition its product offering towards a subscription and cloud-based SaaS model. In doing so, it looks to give the customer a holistic evaluation of its digitization across its operations and provide improvements in energy, carbon and resource intensity in order to aid their shift towards greater efficiency and sustainability.
In the governance of AVEVA, Schneider Electric has outlined three "software governance principles" in order to adhere to its principles of business autonomy and technological agnosticism. They are as follows:
AVEVA's software will remain agnostic - it will be able to operate with or without Schneider hardware.
AVEVA will retain its branding and have business autonomy, along with its own P&L.
AVEVA's software company culture will be preserved by ensuring teams will not be merged into the parent company. This is to attract top software talent, a factor that Schneider Electric considers pivotal to AVEVA's success.
There is also no intention to change either the headquarters or employee base.
However, analysts at Jefferies and Credit Suisse have questioned the decision to keep AVEVA agnostic and independent. Jefferies have stated that despite seeing the industrial logic in areas such as SaaS and cost efficiencies, they "find the valuation expensive and need answers (as to) why they are not pursuing greater hardware integration"
The market reaction was as expected for an acquisition where the acquirer has a market cap of nearly 8x the target - shares in AVEVA rose 2.2% while Schneider Electric was down 1%.
The completion of Schneider Electric’s acquisition of AVEVA is a unique proposition to combine energy and software that will significantly increase customer value in the long-run through the availability of safe, reliable, efficient and sustainable energy solutions. Firstly, given the recent energy crisis and the focus on sustainability, energy transition is one of the biggest challenges and its digitization will enable full transparency and optimised management to allow industries reach carbon neutrality. In fact, the continued transition of AVEVA to an industrial hybrid cloud-based subscription and the acceleration of its SaaS model will lead to full digitization in the long-run and stepchange improvements by reducing energy, carbon and resource intensity and accelerating customer journeys of efficiency and sustainability.
Another key point is that Schneider Electric is willing to invest heavily in R&D to further improve AVEVA’s software technology and, thus, create a range of products that will cover a greater customer base. The acquisition will also accelerate growth in the future through a simplified and coordinated Agnostic Software, operational flexibility and simplification as well as more technology convergence through closer cooperation in R&D.
Risks and Uncertainties
Schneider’s management board announced that the company plans to retain AVEVA's agnostic business model, standalone operations, and said that it is not planning to reduce the number of employees in the Cambridge-headquartered company in the foreseeable future; nonetheless, AVEVA had previously issued a profit warning in which it flagged inflationary pressures, slower growth, and the need to invest more in cloud computing division which would push down margins.
Shareholder disapproval is another important factor to consider. According to Canada-based Mawer Investment Management, one AVEVA’s top 5 shareholders, the Schenider bid undervalues the UK software company and exploits the recent stock market slide, even despite its 40% premium over the AVEVA’s closing price when the bid was made public. The Canadian fund’s view mirrors that of M&G Investments, another AVEVA’s shareholders that issued a press release stating that it is going to oppose the terms of the deal and vote against it. Overall, in order for the deal to close, Schneider would need to secure at least a 75% approval of AVEVA’s minority shareholders.
This sentiment of minority shareholders poses a huge threat to the deal’s potential success as they believe AVEVA is trading at depressed levels because of overall low technology valuations, macroeconomic uncertainty, and business model pivot from licence towards a subscription-based service. Nonetheless, AVEVA said that a committee of its board has reviewed the offer and intends to recommend that shareholders accept with the final vote due on November 17th.
“Customers are increasingly turning to industrial software to find greater efficiency and sustainability, and the combination with Schneider Electric will enable AVEVA to execute its strategy faster and further enhance its customer proposition” - (Philip Aiken, Chairman of AVEVA)