Thales to acquire Gemalto for EUR 4.8 bn: the largest European technology deal of the year

Thales and Gemalto announced yesterday that they have reached an agreement on an all-cash offer from Thales to acquire all Gemalto shares at EUR 51 per share cum dividend, representing a EUR 4.8 billion valuation for the company. The acquisition will be funded by Thales from a combination of available cash reserves and a EUR 4 billion credit facility. The transaction is dependent on shareholder and regulatory approvals and clearances, with closure expected during the second half of 2018. Thales Chairman and CEO, Patrice Caine said he does not expect any antitrust issue that would hinder the project.

Atos, which made an offer for Gemalto at EUR 46 per share last week, rejected by Gemalto management as “significantly undervaluing the company,” has already announced it wouldn’t pursue it after Thales announcement. Although the announcement has provisions allowing a better offer that would be over 109% of Thales one, this is unlikely to happen. Thales – Gemalto combination is unanimously recommended by Gemalto’s board of directors and unanimously approved by Thales’s board of directors, according to the companies.

The project as presented by the two companies is to create “a world leader in digital security.” They say that the integration of Gemalto strongly accelerates Thales strategy in connectivity, cybersecurity, data analytics and artificial intelligence, reinforcing Thales’s digital offering, across its five vertical markets (aeronautics, space, ground transportation, defence and security).

Thales and Gemalto have developed an expertise in addressing the needs of operators of critical infrastructures including banks, telcos, governments, utilities, and general industries and propose a solution portfolio including security software, expertise in biometrics and multifactor authentication and the issuance of secure digital and physical credentials.

France-based Thales is present in the Aerospace, Transport and Defense & Security segments, its 2016 sales reached EUR 14.9 billion leading to EUR 946 million net income. The French government owns c. 26% of the shareholders’ equity, Dassault Aviation, “the industrial partner,” owns c. 25%, and 46% are owned by individual and institutional shareholders

Gemalto is to be integrated in Thales in the form of a new business unit headed by Philippe Vallée, currently Gemalto CEO, which will keep its name and come in addition to the existing BUs of the company. The “digital security Global Business Unit” will combine existing Gemalto activities with those of Thales Digital Factory, Thales eSecurity, artificial intelligence experts and Guavus, a US-based company involved in real-time big data processing and analytics acquired by Thales earlier this year.

This will represent c. 20% of pro forma Group revenues and make Thales rank among the top three players worldwide, with EUR 3.5 billion revenues in the fast-growing digital security market. Thanks to Gemalto integration, Thales anticipates offering an end-to-end solution, to secure critical digital decision chains, from data creation in sensors to real-time decision making.

Thales ambition is clearly to position the new entity on the digital security markets. The company considers it will rank #2 in this business with a US$ 4.2 billion (EUR 3.57 billion) revenue, just after Symantec (US$ 4.3 billion – EUR 3.66 billion) and ahead of Idemia, the result of the Oberthur-Morpho merger (US$ 3.2 billion – EUR 2.7 billion) with Deloitte, IBM, Cisco, EY, PWC, Palo Alto Networks, and McAfee. Among Gemalto activities, the focus is put on ePayment and IoT/M2M while activities such as payment cards and mobile communication are anticipated to be shrinking or flat. The fact that Gemalto is the world leader on the SIM card business and a significant player on the EMV card market seems to meet little recognition in Thales projects. However, in a conference call this morning, Patrice Caine, Thales Chairman and CEO, said they intend to keep all Gemalto’s activities including SIM cards.

Although Thales “warmly welcomes Gemalto’s 15,000 employees to [the] Group” and says it will preserve employment at Gemalto’s French operations until at least the end of 2019 as a consequence of this transaction, the company expects synergies, reaching EUR 150 million euros by 2021, coming from R&D and SG&A (Selling, general and administrative expenses) optimization on enterprise security and SG&A savings on Gemalto perimeter. At the same time, Philippe Vallée, Gemalto CEO reaffirmed the job cut plan that will lead to 288 redundancies in France will nevertheless be executed.

Disclaimer: I own some Gemalto shares