British engineering software company Aveva Group PLC (LON:AVV) has confirmed it is to merge with Schneider Electric’s software business, in a deal worth more than £3bn.
In reaction, shares in Aveva surged 24.79% to 2,396p in early trading.
The deal ends two years of talks between the two companies about a possible merger.
READ: AVEVA shares tank after deal talks collapse for a second time
French energy firm Schneider will take a 60% stake in the enlarged Aveva Group, which will remain listed in London. Aveva shareholders will own the rest of the combined group.
Schneider will pay Aveva £500mln in cash for the deal, which is structured as a reverse takeover.
Aveva shareholders will receive a total of 1,014p per ordinary share at or around completion of the deal, including 858p from Schneider and 156p in surplus cash from Aveva.
The merger is expected to be completed by the end of this year, subject to regulatory and Aveva shareholder approvals.
New boss to head merged company
Aveva and Schneider are searching for a new chief executive to lead the enlarged group.
James Kidd, the chief executive of Aveva, will step down to the role of deputy chief executive once the merger is completed and a replacement is found.
Aveva said the merged company will create a “global leader” in industrial software with combined revenues of £657.5mln and adjusted underlying earnings (EBITDA) of £145.8mln for fiscal year 2017.
READ: Engineering software specialist Aveva expects return to full year revenue and profit growth on weaker post-Brexit pound
Aveva says deal will diversify business
Aveva, which supplies software to the oil and gas, mining, and paper and pulp industries, said the deal will broaden its end-markets. It said the merger will enhance its position in oil and gas, power and marine while adding chemicals, food and beverage, pharmaceuticals, mining, water and waste water and infrastructure.
Aveva added that it will benefit from the Schneider Electric software arm’s exposure to the North American market.
“The directors of Aveva and Schneider Electric believe that the combination is transformational for both Aveva and the Schneider Electric software business in that it creates a combined entity with significant international scale and reach that is positioned to offer a broad and comprehensive portfolio of engineering and industrial software.
“The combination will leverage the existing strengths of both businesses and is expected to bolster both the market share and reach of the enlarged Aveva Group's combined product offering. It is also expected to broaden its geographic presence, expand customer diversity and create a highly scalable, leading global software provider.”
The deal will also allow for significant cost cutting as Aveva's business comes under pressure from low commodity prices.
Several failed attempts at merger
Since talks about a merger began in 2015, the companies have had several failed attempts at agreeing the terms of the deal. The first attempt fell through in December 2015, six months after an intial agreement.
The companies blamed “integration challenges" due to the complexity of disentangling the software assets of Schneider that could not be overcome without "considerable additional risk and cost”.
A fresh approach made by Schneider for Aveva in June 2016 collapsed after two days.
UBS noted that in the first proposed deal, Aveva was due to receive a 53.5% share of the combined entity in return for £550mln.
But the bank said the shift in the ownership ratio is justified as Schneider has since expanded and grown sales. UBS added that since the first attempt, the companies have done much more ease concerns about integration issues. It repeated a 'buy' rating and target price of 2,100p.
AJ Bell investment director, Russ Mould, said: "The reverse takeover will be transformational to AVEVA and create a leader in industrial software, which will be able to better compete on a global scale."