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Capgemini's $4 Billion French Deal Is Too Cheap

Chris Hughes

(Bloomberg Opinion) -- It’s not quite a stitch-up — you’d need the state to be a big shareholder for that to apply. But the 3.6 billion euro ($4 billion) takeover of tech consultancy Altran Technologies SA by domestic peer Capgemini SE looks like an attempt to build a French champion without giving the target’s shareholders a good price. With activist-in-chief Elliott Management Corp. siding with minority investors, there are principled and self-interested reasons for Capgemini to increase its offer.

The takeover would strengthen the buyer’s consulting business and give financially stretched Altran a robust parent. The market sees big benefits. Capgemini’s then 17 billion-euro market value gained 10% in the weeks after the deal was agreed in June, despite it proposing to pay a premium worth 650 million euros. Shareholders were relieved that Capgemini wasn’t doing something stupid with its strong balance sheet. But the market reaction gave away that the savings and revenue opportunities from a deal were probably higher than stated and that their value would be taken chiefly by the buyer.

Altran’s justification for backing the 14 euros-a-share offer is that it contained the full value of what it would be doing if it remained independent. A retrospective fairness opinion assessed that the company was worth between 12 euros and 13.70 euros per share. The sector has weakened more recently, seemingly making the offer even more attractive.

Nevertheless, it’s not difficult to imagine the shares exceeding the offer price under their own steam. Altran’s earnings targets imply it will make 580 million euros of operating profit in 2022. If that outcome was still in sight in 2021, the company would have an enterprise value of 6.4 billion euros when using the operating profit multiple that it commanded before news of the Capgemini deal emerged. Deduct an estimated 1.4 billion euros for net debt and other liabilities, adjust for time, and the equity is then worth 4.4 billion euros, or 17 euros a share.

Even if Altran shareholders worry — like some analysts — that the 2022 plan won’t fully deliver, they still deserve a bigger slice of the deal’s upside.

Altran’s credibility in backing the deal was weakened by the revelation that its chief executive officer Dominique Cerutti had a bonus tied to former lead shareholder Apax Partners SAS exiting its stake. The deal has facilitated that outcome: The private equity firm recently sold to Capgemini. Cerutti rightly recused himself from the last of several board votes on the transaction, and he gets a top-up bonus if there’s a higher bid (aligning him with the remaining shareholders). However, the value of his payout hasn’t been disclosed, raising questions about whether his incentives were skewed toward one shareholder, Apax, that was keen to sell.

This wouldn’t matter so much if it was easy for a counterbidder to step in. But foreign gatecrashers may be wary of breaking up an all-French deal. Activist investors have no such fears. Colette Neuville, a regular defender of French minority shareholders, is delaying the deal with a court action. Hedge fund Elliott has built a 10% Altran stake, saying in a filing that the Capgemini offer undervalues the business.

A sweetener is affordable, and Altran holders deserve it. For Capgemini, a bump might pay for itself by getting the deal back on a shorter, more predictable timetable.

To contact the author of this story: Chris Hughes at chughes89@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

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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