This Market Loves a $5 Billion Growth Story

(Bloomberg Opinion) -- It’s an unusual deal. A U.K. bidder has won a global auction for a $5 billion technology business, paying a punchy price and asking its shareholders to stump up one-third of its market value in cash to pay for it. But this is a forgiving environment when the purpose of M&A is buying growth, and that’s good news for sellers, including Japan’s SoftBank Group Corp.

Circumstances conspired to make Osisoft, a provider of software for industrial applications, available. SoftBank, with a 45% stake, has been tidying up its portfolio and raising cash to cut leverage. Majority shareholder and founder J. Patrick Kennedy was clearly open to a transaction that secured his company’s future within a stronger parent.

Meanwhile, winning bidder Aveva Group Plc was clearly keen. The deal values Osisoft at a high 33 times trailing operating profit. Osisoft’s revenues have been growing around 10% a year, and operating margins have expanded from 21% in 2016 to 31% currently. Even assuming that rate of growth continues, and margins expand further, generating more than mid-single digit returns on the purchase price looks like a challenge within five years. That said, Aveva’s aspirations for increasing Osisoft’s sales could play into boosting the returns on the investment, as will tax savings arising through the accounting treatment of the acquisition.

Aveva came to the situation armed with a strong share price to use as an acquisition currency. Kennedy will take some of his payment in shares. But that still leaves $4.4 billion of cash to find. Of that, 80% will come from a rights offering, the rest by taking net debt up to around twice Aveva’s annual Ebitda.

This is very ambitious for a company that has historically had net cash, and whose market value is just 7.4 billion pounds ($9.7 billion) itself.

The support of Schneider Electric SE, the 61 billion-euro ($72 billion) French industrial group that owns 60% of Aveva, is hugely helpful. It’s unclear whether Aveva could pull off such a giant equity increase if its ownership was spread among institutional investors. A smaller capital hike, and more debt, might have been possible. But the warm reaction this deal has received might not have been replicated.

Contrast this with the fortunes of diagnostics group Siemens Healthineers AG in its $16 billion deal for U.S. radiotherapy group Varian Medical Systems Inc. The near-term outlook for Varian’s business is cloudy and Healthineers’ parent, Siemens AG, is not going to participate in a rights offer for the deal. Instead, it is providing a jumbo bridge loan. The huge equity requirement appears to be weighing on Healthineers’ share price.

The backing of a major shareholder clearly helped out in Aveva’s case. But it may not have been essential. Other acquisitive CEOs on the prowl for growth will take heart.

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

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

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