There’s a very good chance that other predators are silently circling Fidessa (FDSA), the global leader in trading software systems and data to financial institutions which has today become a bid target.
News of takeover talks with Switzerland-based Temenos, the global banking software company, seemingly came out of the blue. Temenos has proposed to pay £35.67 per Fidessa share in cash.
Fidessa’s shareholders would get to keep the 29.7p second half dividend announced in yesterday’s full year results, plus the 50p special dividend, taking the final per share offer up to £36.467.
That’s quite the premium considering the stock has spent five years or so trapped in an approximate £20 to £25 range.
RARITY AND VALUE EXTRACTION
Shares has previously argued that a takeover of Fidessa looked unlikely. But now that the seal has been broken and a firm offer tabled, there’s good reason to believe other parties may want to consider making an offer.
Partly it’s down to rarity value. Fidessa is widely considered to be the biggest and best at what it does. Opportunities to take control of a business with high recurring revenues (circa 90%), a bullet-proof balance sheet and super cash flows do not come along often.
But dig into Fidessa’s performance a little deeper and there looks like there are solid cross-sales opportunities and operational savings to be made from a merger.
Fidessa’s operating margins, for example, come in at around 14% (based on yesterday’s figures). In contrast, lease finance software designer Alfa Financial (ALFA), a business of similar size in its own niche, runs on 31% operating margins.
SCOPE FOR MARGIN IMPROVEMENT
Stripping out capitalised development costs from EBITDA (earnings before interest, tax, depreciation and amortisation), analysts at Megabuyte calculate Fidessa margins of 16% versus Alfa’s 45%.
Megabuyte’s Rob Warensjo believes such a comparison makes a broader point of how low Fidessa’s profitability is for such a mature software business running at circa 90% recurring revenues, alongside several years of subdued top-line growth.
Clearly Temenos sees value to be extracted from the Fidessa operating model that current management have not.
Others may also see an opportunity, such as FIS Global or ION Investment Group, Warensjo highlights. Or perhaps there could be buyers from the cash rich private equity sphere, although we see that as less likely.
