Overview of the deal
Acquirer: Thales (EPA: HO)
Target: Gemalto (AMS: GTO)
Estimated value: €4.8 bn
Announcement date: 17/12 - 2017
Acquirer Advisors: Lazard, Messier Maris & Associes, Societe Generale
Target Advisors: Deutsche Bank and JPMorgan Chase & Co.
Just a week after the announcement of Atos’ proposed €4.3 billion takeover of Gemalto, Thales and Gemalto announced that they had reached an agreement on an all-cash offer from Thales to acquire all Gemalto shares at €51 - a €4.8 billion valuation. This made the deal the largest European technology M&A deal of 2017. Gemalto’s management stated that Atos’ offer significantly undervalued the company.
Over the past three years, Thales has focused on improving its digital technologies, investing over €1 billion in connectivity, cybersecurity, data analytics and artificial intelligence, for example with the acquisitions of Guavus, Sysgo, and Vormetric. The Gemalto-acquisition is a natural strategic move for Thales, given its vision to become the global leader in digital security.
The FT highlights Gemalto’s recent profitability issues, including a writedown of €420 million because of “Deteriorated prospects”. In light of this financial background, the FT emphasises the potential synergies the deal could generate; €80-120m pre-tax cost synergies by 2021, “as well as meaningful revenue synergies”.
Company details (Thales)
Thales is a French multinational information system technology company which provides advanced data security solutions for the aerospace, defence, transportation and security markets.
- Founded in 2000 and headquartered in La Défense, France
- Chairman and CEO: Patrice Caine
- Number of employees: 64,000 (As of 2016)
- Market Cap: €21.01 bn - EV: €17.57 bn
- FY2017 Revenue: €15.8 bn - FY2017 EBITDA: €1.97 bn
- EV/Revenue: 1.11x - EV/EBITDA: 8.92x
Company details (Gemalto)
Gemalto is an international digital security company providing software applications and secure personal devices.
- Founded in 2006 and headquartered in Amsterdam, Netherlands
- CEO: Philippe Vallee
- Number of employees: 15,000 (As of 2016)
- Market Cap: €4.49 bn - EV: €5.08 bn
- FY2017 Revenue: €2.97 bn - FY2017 EBITDA: €0.46 bn
- EV/Revenue: 1.71x - EV/EBITDA: 11.04x
Projections and assumptions
Short-term consequences
Thales has made a €51 per share all-cash offer for Gemalto. This represents a 57% premium on the share price - which soared 33.5% after the announcement. The agreement came just days after Gemalto rejected Atos’ €4.3bn (€46 per share) takeover proposal, which, according to Gemalto, was a hostile approach. The announcement has provisions for allowing a better offer (109% over Thales bid), however, this is very unlikely to happen.
The deal is expected to be financed with a combination of cash and a €4 billion credit facility. The transaction is expected to close during the second half of 2018. Further, the timing of the acquisition is attractive; Gemalto’s share price has lost 14% during last year and Thales would pay for an EV/EBITDA multiple of 11x, compared to the software industry average of 19.3x.
By acquiring a leader in data security, Thales adds over €3bn of revenue and strengthen its market position - the combined entity is expected to rank #2 in the business. According to Thales’ Chief Executive, Patrice Caine, the acquisition is a key milestone in the implementation of Thales’ strategy. It remains to see how the combined company will develop in the future.
Long-term upsides
The long-term rationale of this deal is clear: to create a global leader in the digital security industry. Thales explains that the integration of Gemtalo and its technology, employees, and expertise, will accelerate Thales strategy regarding connectivity, cybersecurity and artificial intelligence.
The acquired technologies and competencies have applications in all of Thales' five vertical markets. Therefore, the deal is expected to give Thales a stronger product offering, mainly in terms of security software, biometrics and multifactor authentication and the issuance of secure digital and physical credential, and thus, generate long-term revenue synergies. Moreover, the acquisition is expected to result in pre-tax cost synergies of around €100-150mn by 2021.
In practice, Gemalto is going to be integrated in Thales by creating a new business unit, led by Gemalto’s CEO Philippe Vallée. The unit will operate under its own brand, however, Thales also plans to integrate Gemalto's technology into its existing “Digital Security Global Business Unit”, which includes Thales Digital Factory and Thales eSecurity.
In addition, the French government owns 26% of shareholders’ equity. Therefore, Thales’ ownership of Gemalto can be seen as a way for France to keep important technologies under sovereign control.
Risks and uncertainties
Having received the official support of the board of Gemalto, the only remaining hurdles to the deal are regulatory approval and shareholder ratification. The final stages of regulatory approval are are expected be reached during the latter half of 2018, common belief is that the deal will pass without amendment. To be realized, the deal needs the approval of investors with cumulative holdings of at least 67% of Gemalto at the AGM May 17.
The trend of decreasing demand for SIM-cards in recent years has taken its toll on Gemalto’s profitability. Leading up to Atos’ takeover offer in 2017, they issued four profitability warnings. There is no indication of a trend reversal and Gemalto has been struggling to scale the other operations of their business to make up for it. This responsibility will now be transferred onto Thales, who hope to leverage their corporate infrastructure to achieve this transition. However, the largely credit-fueled financing of the deal furthers the urgency with which they must get it right.
The digital securities market is growing quickly, it is estimated that it will be worth €11.8 billion by 2020. This is expected to attract more competition to an already competitive market. Not least in the payment sector which has seen significant market consolidation, PayPal’s acquisition of Xoom, and D+H’s acquisition of FundTech to name a few.
In the position statement issued April 27, Gemalto declared that: “The “new Gemalto”, through the Thales DIS GBU operating structure, will be considerably expanded and strengthened and will be in a stronger position to implement its transition plan from its traditional banking and telecom smart cards to the rapidly growing government, enterprise, cyber-security and secured internet-of-things businesses.”
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