Don’t confuse UK investors with full pushovers

A takeover bid for one of the UK’s few publicly traded software companies, regardless of size, is meeting resistance. When stocks are falling everywhere, snubbing a cash offer is brave. But Aveva Group Plc shareholders are right to hold on. The situation is emblematic of the opportunistic offers that could be seen exploiting the collapse of the pound this year and the vulnerability of certain British stocks.

French industrial giant Schneider Electric SE has a 59% stake in Aveva after it injected its own software division into the Cambridge-based company in 2017 and received shares in return. In this transaction, Aveva shareholders ceded control. For this, they were rewarded with a special dividend.

Schneider is now set to secure 100 per cent ownership and last month made an offer for the minority stake valuing the company at £10.2 billion ($11.3 billion), including assumed net debt. . It came as Aveva was reeling from a profit warning and the global tech rout. The title was also hurting as the company gradually shifts from selling one-time licenses to multi-year subscriptions, temporarily depressing revenue.

Aveva’s independent directors approved the £31 per share offer, not least because the premium offered – 41% above the undisturbed share price – is the seemingly handsome complement you see from Aveva’s share price. bidders who do not yet have influence. Absent a deal, shares of Aveva may now have fallen further. Thus, the premium embedded in the offer price could be considered to have increased.

But premiums aren’t the only guide in trades, especially when the target is at rock bottom. The simple question for Aveva shareholders is whether the stock can reach the offer level in the foreseeable future on its own.

Terms value Aveva at around 33 times forward earnings, which is in line with the average since Schneider took its stake. Compared to the next 12 months’ earnings before interest, taxes, 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.

Of course, tech stock ratings continue to decline. But those aren’t compelling multiples to go out on, especially since the reliability of subscription revenue should support Aveva’s future business valuation.

The business looks promising. Many analysts are skeptical of Aveva’s aggressive growth targets for 2026, a doubt reinforced by the company’s grim business statement last month. The dispersion of forecasts for the company is wide. But average estimates call for free cash flow to grow nearly 90% between the current fiscal year and fiscal 2026. Aveva just needs to revise where it was trading in January to match the price of l ‘offer. With this trajectory, could it really take more than two years?

Schneider, capitalized at 68 billion euros ($66 billion), can clearly afford to pay a price that better reflects the upside. A 10% increase would cost less than an additional £400m for the minority stake. No wonder M&G Investments and Mawer Investment Management voiced their opposition as soon as the deal was announced. Hedge fund Davidson Kempner Capital Management has amassed a stake and wants a sweetener, Bloomberg News reported last week. Together, these investors hold 6% of the company. In its current structure, the deal fails if opponents accumulate 10%.

This is a litmus test for expected future deals for UK businesses at a historically vulnerable time. Pushback has an added benefit here: making other opportunists think twice.

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

Chris Hughes is a Bloomberg Opinion columnist covering the deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

More stories like this are available at bloomberg.com/opinion

Robert D. Coleman