INDEPENDENT RESEARCH IT Software & Services 30th June 2014 Marriages of convenience IT Software & Services ALTEN NEUTRAL FV EUR36 Historical M&A deals in the IT sector show that the market has been Last Price EUR34.675 Market Cap. EUR1,151m picking up since the beginning of 2014. Software vendors are seeking ALTRAN TECHNOLOGIES BUY FV EUR9.4 Last Price EUR7.8 Market Cap. EUR1,364m growth opportunities, while consolidation in the services segment (Atos- ATOS BUY FV EUR76 Bull, Sopra-Steria) is rather based on defensive deals. Our guess is that Last Price EUR61.6 Market Cap. EUR6,166m the next M&A deals will involve Sage, Indra, and Temenos. AXWAY SOFTWARE BUY FV EUR33 Last Price EUR22.5 Market Cap. EUR462m Greater activity in the M&A market in 2014 compared to 2013. CAPGEMINI BUY FV EUR64 There were 5 transactions exceeding USD1bn in H1 2014, vs. only 1 in Last Price EUR52.48 Market Cap. EUR8,348m H1 2013. Catalysts are: 1) In the software segment, the strengthening of the DASSAULT SYSTEMES NEUTRAL FV EUR87 Last Price EUR94.05 Market Cap. EUR11,962m main cloud providers, and the growth in addressable markets; 2) In the IT GROUPE STERIA Tender to the offer FV EUR22 services segment, defensive deals, which prevail as clients tend to seek cost- Last Price EUR19.41 Market Cap. EUR644m effective solutions. INDRA SISTEMAS SELL FV EUR11 Last Price EUR13.06 Market Cap. EUR2,144m SAGE GROUP NEUTRAL FV 400p Atos-Bull: first marriage of convenience. We estimate that Atos’s Last Price 384.8p Market Cap. GBP4,206m takeover bid on Bull will have an accretive impact on Atos’s EPS of 15% in SAP BUY FV EUR71 2015 and 17% in 2016, taking into account cost synergies of EUR80m. Last Price EUR56.32 Market Cap. EUR69,189m According to our valuation, net synergies amount to EUR2-3 per share. SOFTWARE AG BUY FV EUR34 Last Price EUR26.405 Market Cap. EUR2,296m SOPRA GROUP BUY FV EUR105 Sopra-Steria: another marriage of convenience. We estimate that Sopra’s Last Price EUR80.87 Market Cap. EUR964m share exchange offer on Steria will have an accretive impact on Sopra’s EPS SWORD GROUP BUY FV EUR21 Last Price EUR18.45 Market Cap. EUR171m of 11% in 2015 and 18% in 2016, taking into account operational synergies TEMENOS GROUP NEUTRAL FV CHF33 of EUR62m. In our views, this deal is both driven by a defensive strategy Last Price CHF34.3 Market Cap. CHF2,470m for the company and a wealth preservation strategy for its owners. According to our valuation, net synergies amount to EUR8-9 per share. Our guesses for the next M&A deals are: Sage, Indra, and Temenos. 1) Sage and Temenos are, in our opinion, ideal targets for private equity funds, since they boast high profit margins, cash flow structurally higher than the EBITDA, and consistent profit distribution policies; 2) Indra is still a highly “political” case, but we do not rule out a separation between IT services and defence operations. Although their acquisition is unlikely, Software AG and Altran should be closely monitored... just in case! Analyst: Gregory Ramirez 33(0) 1 56 68 75 91 [email protected] r r IT Software & Services Table of contents 1. Valuation ...................................................................................................................................... 3 1.1. Software ............................................................................................................................................... 3 1.2. IT Services........................................................................................................................................... 3 2. New momentum in the M&A market .................................................................................... 4 2.1. Greater market activity in 2014 versus 2013 ................................................................................. 4 2.2. Software: cloud and market expansion .......................................................................................... 5 2.3. IT services: defensive consolidation + expansion ....................................................................... 9 3. Atos-Bull: first marriage of convenience ...................................................................................... 13 3.1. Rationale for the deal ...................................................................................................................... 13 3.1.1. Deal specifics ...................................................................................................................... 13 3.1.2. Strategic relevance: cloud, big data and cyber security ................................................ 13 3.2. Expected synergies of EUR80m ................................................................................................... 16 3.3. Accretive impact of at least 10% on EPS .................................................................................... 18 4. Sopra-Steria: another marriage of convenience ................................................................... 20 4.1. Rationale for the deal ...................................................................................................................... 20 4.1.1. Deal specifics ...................................................................................................................... 20 4.1.2. Strategic interests: consolidation and owners’ interests .............................................. 21 4.2. Synergies of EUR62m put to the test .......................................................................................... 23 4.3. Accretive impact of at least 20% on est. EPS ............................................................................. 26 5. And now who’s next? .............................................................................................................. 28 5.1. Sage Group (Neutral, FV 400p) .................................................................................................... 28 5.2. Indra Sistemas (Sell, FV EUR11) .................................................................................................. 28 5.3. Temenos Group (Neutral, FV 33CHF) ....................................................................................... 29 5.4. Other potential targets .................................................................................................................... 30 5.4.1. Software AG (Buy, FV 34EUR)...................................................................................... 30 5.4.2. Altran Technologies (Buy, FV 9.4EUR) ........................................................................ 30 Bryan Garnier stock rating system .............................................................................................. 47 2 IT Software & Services 1. Valuation 1.1. Software Fig. 1: Comparable companies – Software Currency Rating Price Fair Market P/E (x) EV/Sales EV/EBIT 27/06/14 value cap (m) 2013 2014e 2015e 2013 2014e 2015e 2013 2014e 2015e SAP EUR BUY 56.3 71 69,150 17.1 16.4 14.5 4.2 3.9 3.4 13.0 11.8 10.2 Dassault Systèmes EUR NEUTRAL 94.1 87 11,962 24.6 25.0 22.2 5.1 4.8 4.2 16.3 15.9 13.5 Sage Group GBP/p NEUTRAL 384.8 400 4,206 17.5 17.0 15.7 3.3 3.4 3.1 12.1 12.3 11.1 Software AG EUR BUY 26.3 34 2,287 13.2 13.0 11.6 2.5 2.4 2.2 9.6 9.1 7.5 Temenos Group CHF NEUTRAL 34.3 33 2,470 31.2 26.2 22.1 6.1 5.6 4.8 23.2 19.9 16.7 Axway Software EUR BUY 22.5 33 462 10.7 13.7 11.4 1.9 1.8 1.5 12.0 11.1 8.2 Software median 20.7 19.5 17.2 4.2 4.0 3.6 14.8 13.8 11.8 Source: Thomson Reuters; Bryan, Garnier & Co ests. 1.2. IT Services Fig. 2: Comparable companies – IT services and high-tech consulting Currency Rating Price Fair Market P/E (x) EV/Sales EV/EBIT 27/06/14 value cap (m) 2013 2014e 2015e 2013 2014e 2015e 2013 2014e 2015e Capgemini EUR BUY 52.5 64 8,348 15.2 14.7 13.2 0.8 0.7 0.6 9.0 8.1 6.9 Atos EUR BUY 61.6 76 6,166 15.0 14.5 13.1 0.6 0.6 0.5 7.9 7.5 6.3 Indra Sistemas EUR SELL 13.1 11 2,144 17.6 18.4 15.4 0.9 0.9 0.8 12.2 11.8 10.1 Sopra Group EUR BUY 80.9 105 964 12.9 11.1 9.4 0.8 0.7 0.6 10.2 8.5 6.6 Groupe Steria EUR Tender to 19.4 22 644 12.9 11.0 9.0 0.5 0.5 0.4 7.9 7.3 6.1 Sword Group EUR BUY 18.5 21 171 31.3 15.5 14.1 1.2 1.1 1.0 9.3 7.3 6.5 IT Services median 15.1 14.6 13.2 0.8 0.7 0.6 9.1 7.8 6.6 Altran Technologies EUR BUY 7.8 9.4 1,364 14.7 12.6 10.3 0.9 0.8 0.7 9.7 8.4 6.5 Alten EUR NEUTRAL 34.7 36 1,151 14.5 13.8 12.0 0.9 0.8 0.7 9.1 8.3 7.0 High-tech median 14.5 13.8 12.0 0.9 0.8 0.7 9.1 8.3 7.0 Source: Thomson Reuters; Bryan, Garnier & Co ests. 3 IT Software & Services 2. New momentum in the M&A market 2.1. Greater market activity in 2014 versus 2013 5 M&A deals exceeding Mergers & acquisitions are a constant phenomenon in the IT industry, with around 10 deals USD1bn in Q1 2014 in Software and Services exceeding USD200m each year. Nevertheless, market activity vs. only 1 in Q1 2013 seemed greater in Q1 2014 than in Q1 2013, with as many as 5 transactions over USD1bn (Oracle/Micros, Open Text/GXS, Oracle/Responsys, SAP/Fieldglass, Advent International/Unit4), versus only 1 transaction in Q1 2013 (Bain Capital+Golden Gate Capital/BMC Software). This suggests that mergers & acquisitions in the IT industry are back on track after a weaker year 2013. Most acquisitions are taking place in the Software sector, although large transactions are making a strong comeback –especially in Europe– after three rather quiet years. 2005 was the year with the In Software, the years with the greatest number of M&A deals were 2000-01, 2004-08 and 2010- greatest number of M&A