December 18, 2017 / 1:14 PM / a year ago

Breakingviews - Thales’ 4.8 bln euro Gemalto bid puts jobs first

Patrice Caine, Chairman and Chief Executive Officer of Aerospace and defence group Thales, and Philippe Vallee, Chief Executive Officer of chipmaker Gemalto, shake hands before a news conference in Paris, France, December 18, 2017. REUTERS/Philippe Wojazer - RC1537832BE0

LONDON (Reuters Breakingviews) - Thales is riding to the rescue of French jobs at Gemalto. The defence firm has trumped Atos’ tilt at the world’s biggest maker of chips for mobile phone SIM cards. The $4.8 billion agreed deal brings modest returns and leaves Thales exposed to a struggling payments business. The buyer’s biggest shareholder, France’s government, may still be happy.

The Gemalto bidding war is not your average ménage a trois. The group, which is headquartered in Amsterdam but has 3,000 employees in France, last week knocked back an unsolicited bid from Paris-based Atos. It turns out to have been in informal talks with Thales, which is 26 percent-owned by the French government and has offered a more than 10 percent premium to Atos’ 46 euros a share offer.

The deal boosts Thales in hot areas like cyber and digital security and Gemalto will make up a fifth of group revenue after the deal. Yet the new businesses also come with baggage. Gemalto’s chip-and-pin payment-card business has been hit by oversupply, and its business making mobile SIM cards is declining.  Investors had sold Gemalto shares down by over 40 percent since the start of the year before Atos’ interest became public.

The 18 billion euro defence group reckons, despite the challenges, that Gemalto can grow sales by 5 percent a year. Analysts were expecting growth of just over 4 percent annually between 2017, a bad year, and 2020, according to Eikon.

Given the risks, Thales’ return on the deal looks mediocre. Analysts expect Gemalto to make 412 million euros of operating profit in 2020, according to Eikon. Throw in cost savings in the middle of the 100 million euros to 150 million euros expected range, and the return on invested capital after tax is just over 7 percent, by Breakingviews calculations. Thales, which may work out the figures differently, reckons the deal will beat its roughly 8 percent cost of capital by 2020 – though HSBC says Gemalto’s cost of capital is over 9 percent.

France’s finance minister Bruno Le Maire last week spoke of the risks that Atos’ offer posed to jobs. Thales has committed not to cut workers and to preserve Gemalto’s French activities for two years. The reprieve may only be temporary, but Gemalto’s employees are the more obvious winners than Thales shareholders.

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