AVEVA Group plc (OTCPK:AVEVF) Proposed Acquisition of OSIsoft LLC Conference Call August 25, 2020 3:30 AM ET
Craig Hayman – Chief Executive Officer
James Kidd – Deputy Chief Executive Officer & Chief Financial Officer
Conference Call Participants
John King – Bank of America
Michael Briest – UBS
James Goodman – Barclays
Charles Brennan – Credit Suisse
Stacy Pollard – JPMorgan
Charles Brennan – Credit Suisse
James Moore – Redburn
Balajee Tirupati – Citi
Good morning everyone and thank you for joining us today. This is Craig Hayman, CEO of AVEVA. I’m very pleased to announce that AVEVA has reached agreement on the terms of an acquisition of OSIsoft at an enterprise value of $5 billion. This is an exciting and important stuff. It further strengthens AVEVA’s position as a global leader in industrial software and enhances AVEVA’s ability to accelerate the digital transformation of the industrial world, while promoting sustainability.
The combination at significant scale and industry diversification, it has strong value creation potential and it’s earning accretive before synergy. Please turn to the Slide number 3. We’ve talked before about AVEVA’s journey to digitalize the industrial sector and how we’re driving operational improvements into the business with a focus on medium-term target including increasing recurring revenue through a focus on subscription revenue.
With the AVEVA-Schneider Electric software merger completed successfully, we looked again at market adjacencies. And I’m delighted and excited that we found in OSIsoft, the perfect fit for our next chapter. These are two leaders with 93 years of combined experience in industrial software that are coming together. We have complementary products and technologies, complimentary customer bases and industries which provide a foundation for continued transformational growth and innovation.
The founder of OSIsoft, Dr. J. Patrick Kennedy, will become a substantial shareholder in AVEVA, one of the top five shareholders in AVEVA, and also our other investors, Schneider Electric, is fully supportive of the acquisition. The transaction is expected to deliver exceptional value for all of our stakeholders including shareholders, partners and customers. OSIsoft has a strong financial profile with a long standing track record and has been delivering double-digit for some time now.
Please turn to Slide 4. The key terms of the acquisition include an enterprise value of $5 billion on cash free and debt free basis. The consideration of $4.4 billion in cash and $0.6 billion in shares issued to Dr. J. Patrick Kennedy, roughly equating to 4% of the launch group company, we’ll put him as one of the largest shareholders as mentioned earlier. This also helps insurers continued interest and involvement in the success of the new company.
Financing will be achieved by $3.5 billion through a proposed rights issue, where Schneider Electric has committed to vote in favor, they’re subscribed to on a pro rata basis. It will also consists of 0.9 billion from existing cash, on the balance sheet and new debt facilities, resulting in a pro forma leverage of less than two times FY ’20 EBITDA of the Enlarged Group. The circular and prospectus to approve the transaction will be launched is expected to be launched October or early November with a closing at or around at the end of the calendar year.
Please turn to Page 5 for an overview of OSIsoft. OSIsoft is a founder led business with a 14-year history of growth and innovation that started back in 1980 with the creation of the PI System, that P-I system. The Company has achieved consistent growth and innovation with a 10% CAGR, strong margins and strong repeat customers with less than 2% churn. PI is a leading data historian technology which connects, collects and stores high fidelity processing production data for use across a variety of applications within the industrial market.
The PI System provides hundreds of connectors or interfaces, which communicate with different devices, systems and sources, things like pumps, motors, turbines, and other industrial assets from all vendors in the market. It collects, organizes and stores all of this information in context within the historian on time. This serves as a cornerstone of the PI System and the backbone old basis for an enterprise industrial information system. It enables various mission critical solutions in areas like advanced process and production analytics, and safety systems in asset health and energy utilization and quality management systems to name a few.
Please turn to Slide number 6. OSIsoft is trusted throughout the world by some of the best companies, as significant presence in the process markets also called the continuous process markets such as power, oil and gas, chemicals and mining, metals and minerals. In power that support several areas within power generation, transmission, and distribution, including grid management, which all use PI.
Power in this case includes both a mix of traditional power generation as well as alternative energy such as wind and solar. In addition to a presence in the 38 top oil and gas providers, they also have a significant presence in metals and mining with PI is used from pit to port, also they have a substantial presence in pulp and paper and pharmaceutical manufacturing.
So let’s look on Slide 7, the combination of the two and this is where the leading — these two leading companies deliver meaningful value to our customers and partners through a combined portfolio that spans engineering, operations and performance management, and based on PI, the leading Information Management System. OSIsoft and the PI System provides this data layer and the basis for many of the data hungry applications that exist within the AVEVA engineering design, operations and performance solution.
This allows you to amongst other things for an agile optimized supply chains, using real time process and production information. PI provides more information which can be used the power AVEVA’s value chain optimization of production planning and scheduling solution. It allows you also to operate critical assets reliably and safely which allows the automated solutions and corrective actions on the PI.
AVEVA’s advanced predictive and prescriptive analytics solutions work in conjunction with a date from OSIsoft PI historian to predict and prevent equipment failure. Remote teams in today’s digitally connected workers need access to rich information in order to help them track, manage, analyze operations and generally work better.
And AVEVA’s procedural enforcements and work processes in a model-driven NEF and unified operations center can be used to increase visibility and provide guidance to the team, which is further augmented and improved by additional production process information from PI. And then also this idea of refining capital investments and improving engineering efficiencies, where AVEVA’s design and engineering portfolio which already has rich access to 1D, 2D and 3D design data now coupled with PI results results in improved operational design.
Please turn to Slide 8. The combination significantly increases the depth and breadth of the Company’s portfolio brings together various sources of design assets and operational data type in the middle here is the information land, the basis of the process and production, which will be further interest through applications and data from the portfolio.
You see, at the bottom of this chart is the edge and with the edge amongst the supervisory control layers are our flagship Wonderware, HMI SCADA and visualization solutions. You can see the access to that data increases the fidelity of those edge and control systems. In the engineering design tools, we can now augment that design data with real time historical dataset in asset performance or APM or artificial intelligence layers where maintenance can be improved using analytics to determine and predict downtime and remediation steps.
More data means a smarter asset performance management. And then optimizing supply chain and production operations, using our MDS systems can support is better supported by more data. If this does end to win industrial software to optimize engineering operations, performance, plus OSIsoft’s PI System as a leading data historian platform to serve core industrial IoT infrastructure markets, so very complimentary product offer.
On Slide 9, we have an example of two customer scenarios. These are live customers that we’ve worked with for many years, where our products already interoperate today. On the left we have a centralized monitoring and diagnostic center which is common in many industries. This shows one customer’s smart innovative operations initiative, which was presented at one of our conferences and is a use case for this customer in different industries.
In this case, the customer is AI to interface with different equipment and control systems. And from there AVEVA’s predictive asset analytics is integrated with the PI System with advanced warning remediation providing improvements in reliability, safety and performance. This is a common use case or application. On the right you have our unified engineering and asset visualization.
This is where asset and production visualization is critical to running and maintaining operations. This is a common use case in oil and gas customers as shown here. Integration putting the products in a variety of areas and include accurate digital design and engineering data from the AVEVA’s unified engineering tools, which includes a comprehensive up to date definition of each asset or digital twin. In addition, similar process production data is used to drive operational and maintenance improvements as integrated providers from PI.
Turning to Slide 10, let’s look more broadly at our customer base. You’ll see that our end market penetration is very different and it was also complimentary with OSIsoft having higher penetration in power and utilities and found in for food and wine and by appliances and metals and money and in chemicals, which further diversifies our overall market footprint. We see great opportunity for customers who are unique to AVEVA, who are unique to OSIsoft and also our shares.
Let me pick a few common questions, a few common customers, but we think there is increased value for those customers by us providing deeper insights and new avenues for value realization for them and for us through multiple solutions in those industries. At Duke Energy, OSIsoft PI and their application framework is used in the renewables business, which increases the ability and increased saving in operation.
And from AVEVA predictive analytics suite is used to increase performance of their critical assets and has so far avoided a $100 million in cost avoidance. At Johnson & Johnson, OSIsoft PI provides real-time data infrastructure as an enabler for the integrated manufacturing and execution system, AVEVA provides supervisory control and data acquisition solutions for them mixed controls environment, plenty of opportunity.
Now on Slide 11, I would turn to our ESG foot print. OSIsoft and AVEVA’s path have different, but we have a lot in common and how we work with customers and how we invest in innovation and how we both understand the value of our employees. We are both committed to the success of all of our stakeholders. AVEVA’s governance is not changing we operate within the UK code and we have rigorous governance standards in line with that code, there will be no changes to AVEVA’s board of directors.
Dr. J. Patrick Kennedy, who joined the Company in an advisory role as Emeritus Chairman to ensure the continuity for customers and employees and support the integration of the two companies. On an environmental and social perspective, we both focus on using technology to reduce the carbon emission footprint of the world and improve, deliver sustainability through technology.
And also we have a very much a focus together on giving back into the communities in which we work in which our employees live through our actual good initiative, where we commit 1% of our profits off the tax to assist societal needs. And we intend to extend those initiatives across the broader group. We are very excited about this combination with OSIsoft.
Let me pull up here and turn it to deputy CEO and CFO James Kidd.
Thanks Craig. Good morning everyone and thanks for joining the call. I’m delighted today to be announcing this transaction. OSI is a company we are monitor a long time and we had various discussions during over the years and delighted that we’re bringing these two great companies together. I’m really excited about the future growth prospects.
If we could move to Slide 12. So first and foremost OSI has an impressive track record consistently delivering double digit growth combined with strong profitability and cash progression. The Company delivered 10% compound annual growth over a 10 year period, which is impressive. Over the last few years, the business has delivered 10% compound annual growth and revenue and 18% growth in adjusted EBIT. This is a financially strong company, which performed consistently over many years.
Revenue for the last trailing 12 months to specially June 489 million and adjusted EBIT of 152 million. Importantly, the growth has continued during the last six months demonstrating with the strong resilient state during the COVID-19 pandemic, resulting in revenue growth for the past six month. One of OSI’s key form indicators is billings to customers, which they use internally to track performance. Consistent revenue billings growth has also been double digit in the last three years and as it also grew in line with revenue over the last 10 years.
The business has a similar margin profile to AVEVA and it delivered strong profitability over the last few years. As you’ll see shortly, the variance for service revenue as part of the mix, which helps to drive strong operating leverage, profitability in the first six months, especially at June 2020 was £42 million, which is strongly up compared to the previous year. The business is highly cash generative and has consistently converted more than a 100% of profits into cash.
And finally, just a note, in terms of the numbers presented here, these are under U.S. GAAP. The Company has adopted ASC 606, which is a latest revenue recognition standard in the U.S. which is equivalent IFRS 15 which AVEVA apply. Revenue for the six months at June is under the new standard ASC 606 whereas the years from 2016 to 2019 are under the previous standard ASC 605.
As Craig mentioned, we will be launching a rights issue in the next couple of months, and the circular and prospectus will continue three year track record for OSIsoft with the key difference being that will be under IFRS according to accounting policies, rather than the U.S. GAAP numbers. That said, we’re now expecting to feel differences from the U.S. GAAP numbers, and you should be aware that, the numbers ultimately in the perspectives will be slightly different.
If you could move to the next slide, please. First I’ll look at the business in a bit more detail. As I mentioned before, OSI uses billing to track performance rather than revenue. Here, we compare the OSI’s business against AVEVA’s performance for the last financial year across 4 different dimensions. Starting with the recurring revenue, OSI has a similar level of recurring revenue to AVEVA’s to 61%. However, as you’ll see, the main differences in natural mix is 57% of that coming from maintenance.
OSI’s commercial modal is largely a traditional perpetual license and maintenance business, but only a small amount of prescription compared to part of the mix. OSI does have a largest mix of maintenance billing of annually approximately £265 million, with high renewal rate and low churn, based in its AVEVA business, reflecting the sticky nature of the software. OSIsoft’s two types of license agreements, standard software, license billings and maintenance, typically charge around 15% of the license, with the first year being mandatory
And the other model is around enterprise agreements, which also contain a perpetual license, but also provide maintenance for each five years. These are typically taken by the larger customers for wider scale deployment. OSIsoft is in the early stages of driving subscription growth, and giving the AVEVA track record in the last couple of years. This is an area that we believe we can accelerate through our experience and help to create new subscription offerings, particularly using AVEVA Flex.
This will increase selling subscription to new customers rather than perpetual licenses as well as contrasting existing customers. In terms of services, you can see a very small foster the mix and mostly instrumentation is done SI System integrators and other partners. From a geography perspective, OSI have a big presence in the U.S. which will help to accelerate our plans to expand in that market building on our existing business and selling to new customers and verticals.
APAC is a smallest region for the Company and we believe that we can leverage our presence in Asia, particularly in China, Korea and Japan to help drive growth. And we think, there’s also opportunities in EMEA to also expand. From a customer’s perspective, you can see there’s little customer concentration, which is obviously good. As we have many customers and comment. And based on our experience from the AVEVA-Schneider Electric allows us to sell more into those accounts, and leverage the power of the combination.
And finally go-to-market perspective, OSI is a relatively small amount of revenue coming from the indirect channel, and we believe we can leverage the strengths of the AVEVA distributors to help sell OSI PI together with other applications. So all-in-all, we believe that really powerful combination bring these two great businesses together with a lot of revenue synergy potential.
Move to the next slide please. So here, we provide a bit more analysis on the employees by function and geography. We will be providing more detail on the cost base and the perspectives but here just wants to give you a sense of what the overall cost look like. I’m sure functional splits are actually pretty similar to AVEVA. A new OSI is well invested in R&D with a particular focus on cloud pretty similar to AVEVA.
OSI is the sizable customer success organization and as a very good reputation for supporting its customers having invested in that function as the last few years. And finally, from a geography perspective, you can see that OSI is a pretty big presence in the U.S. and that will help strengthen our business there.
You can move on to the next slide please. So as you know, AVEVA has set medium-term targets back in September 2018, following the merger with the Schneider Electric software business. The OSIsoft performance is strongly aligned with targets for the top-line revenue growth time spent. The current revenue is 61% and adjusted EBIT margin of 26% in the last financial year.
We believe is similar to the AVEVA-Schneider merger, if there’s significant synergy opportunities cross selling intersects customer bases up selling the wider portfolio and also selling into new market adjacencies as Craig mentioned, such as pharmaceutical, mining, power distribution and others.
And much like the Schneider-AVEVA merger, this deal is much more about future growth rather than cost saving. But that said, we do expect there to be some level of cost synergies. Mainly through consolidation of offices, combining IT systems and integrating the back office. And finally, on value where there’s a significant value we get on tax, where the acquisition will help reduce the group’s effective tax rate to arrange 15% from $0.18 for the last year.
This is due to fact that we will get a tax step up on the base value of the assets we acquire within OSIsoft, which will help reduce both our effective tax rates and our cash tax. You heard from Craig, we will be for the first time putting leverage into the business with a 900 million, three year term loan and an increased RCS.
We’re adding a very hardly cash generative business to express OSIsoft and that will help the business to AVEVA over the next three years or so and return the business to net cash. From a valuation perspective we are paying adjusted EBIT multiple of 32.8 times based on the trailing 12 months through especially June for OSIsoft, which is broadly the same as they have even multiple. And in addition to that, we have the value from the synergies and the tax benefits that I just mentioned.
So all in all, we think this is a great deal for AVEVA and its shareholders and other stakeholders for acquiring OSIsoft, which has a strong track record of growth, strong margins and cash generation and potential to really increase future value. Transaction is adding the accretive in the first year for synergy. And we agree that material revenue and cost synergies to be delivered and that will help long-term value for shareholders and other partners.
So with that, I’d like to hand back to Craig with closing comments. Craig, over to you.
Thank you, James. And here we’re on the final page accelerating digital transformation of the industrial world. The circular and prospectus to approve the transaction and launch the proposed rights issue is planned to be published in October or early November. Closing is expected to take place at or around the end of the year. The acquisition of OSIsoft is creating a combined company that will indeed accelerate the next generation of engineering and industrial digital transformation. We’re very excited.
Our paths have been different but our focus is very much the same with delighted, with a complimentary product offerings, the complimentary customer bases that complimentary industry focus. We’re delighted that Dr. J. Patrick Kennedy is joining us as Chairman Emeritus and also becoming one of our top five shareholders. And we of course delighted in what the OSIsoft teams have done in building a high margin business that will deliver material revenue and cost synergies and also an earnings accretive business in AVEVA’s 2022 financial year before those synergies.
With that, let’s close here and open it up to questions. Jordan, we can open the line now please.
Thank you. [Operator Instructions] Our first question comes from John King of Bank of America. John, the line is yours.
Good morning. Thanks for taking the questions. I’ve got three I think two first to Craig, and then one for James. So firstly, obviously we have known about their likelihood of you buying this company for I guess a few weeks now. So I’m just wondering if you’ve had feedback from customers around the proposed transaction and do they like it? And what are they saying about — what are they asking you about?
And then, as far as kind of related questions about how much work have you done on? I suppose more the details of the cross-selling opportunity? When you look at Asia and EMEA we’re obviously OSIsoft is relatively under penetrated. Are they using an alternative product? Or what’s the situation on the ground next? I guess a lot of what you’re talking about in terms of revenue synergies hinges on your ability to displace whatever is the incumbent system there?
And then the last one was for James on the subscription transaction that you noted is perhaps an opportunity for OSIsoft. Obviously, the licenses are pretty significant in revenue stream at the moment. Is there a risk that that causes some short term dent in the revenue growth is as you drive down essentially cannibalize the license revenue? Thank you,
Thanks John. I’ll take the first two. So, you’re right, we did confirm three weeks ago to the market. We were in exclusive talks with OSIsoft and wire we provided no other further commentary. Of course, customers were asking us and providing their views on OSIsoft on the potential of a combination with AVEVA. John, those comments from customers were unbelievably positive.
From our ad hoc emails from customers telling us that they were so very excited, how it was a great strategic choice, how it was a great cultural fit, and how it was a PI System was a great product. I remember being on one zoom call with over a dozen with a customer with over a dozen people from all walks of life in this customer who has one thing in common, which is our relationship with them. And when someone asks about myself and PI everyone in the zoom calls, stopped, turned, looked and gave us great thumbs up and all smiles and that’s a great product. That’s a great choice. Oh, really, that’s a great thing.
To your second point, how much work will be done on the cross selling, especially in Asia and EMEA, where we are in the process, we have just concluded a very aggressive period of due diligence since entering into exclusivity. And we have a wealth of information on where the opportunity lies including selling as you mentioned. The work of implementing that into the organization will happen between now and close expected around the end of the year.
We do see opportunity, OSIsoft really any way as you’ve seen overtime, anytime that they have scaled their go-to-market, they have been benefited from increased penetration. And so, we think inside our logic company go-to-market scale will assist us. And we this is something we saw from the combination of AVEVA and Schneider Electric software, we gave us a martial logic to — go-to-market footprint and have to feel like that we’ve benefited from.
In addition we have a relationship. Our PI is completely independent. It’s the, the Switzerland of the industrial data layer it and it sells into many, many different together with many, many different industrial hardware for us. In addition to that though we have a relationship with Schneider Electric software, a go-to-market relationship, and we expect to leverage that relationship as part of our expansion. I’ll hand the third question to James.
Yes, thanks for questions John. Obviously, there’s more work to do in terms of working out this subscription offering for this business, but inevitably, it will maybe shave a little bit off the growth. But that said, we see a lot of potential through the revenue synergies that was spoken about his cross sell up sell, opportunity to be driving more revenue through a channel to the Schneider relationship. And also to bring it into this AVEVA sales force, which we’ve transformed over the last two years and really, that’s been a big factor in driving growth. So, I think it is right there. We see lots of opportunities to help counteract that slight headwind in terms of subscription.
Our next question comes from Michael Briest of UBS. Michael, please go ahead.
Good morning. Thanks. Thanks a lot, a couple from me as well. Could you talk a little bit about how will they sell? I mean, just looking at the number of customers there’s the top 10 are about $70 million of sales to 7 million even, but massive for big industrial companies that you’re talking to similarly 14,000 implementations it’s about $35,000 per site. So are they selling by the volume of data they process? And is there a product cycle, so once you are at some of the customer they have is it just interested improvements in the product or is it something more substantial that’s happening looking at revenue since its sort of steady metronomic increase there.
And then James, just on the profitability, I mean, it’s been a huge step up in margin in the last 12 months. And then I think the first half year on year that’s the cost base seems to be roughly flat. If the revenue increases drop to the bottom line, have they been doing anything around costs involved, so are they done something to improve profitability? And then the second half seems to be very important for them. So that doing almost double the revenues in H2 that they are in H1, so licenses presumably very second half loaded or confidence do you have, or visibility to have on that second half outcome? Thanks.
You want to take the second one first James.
So from the profitability to all size of new management team, probably about a year ago and they’ve been implementing some of the things, frankly we’ve done in the last couple of years in terms of sales force incentivization and go-to-market our best practices. And that’s actually helping with sustain the level of growth.
In terms of the cost base and I think it was 2017. You see the EBIT margins lower, then that’s when they were investing quite heavily in new system, such as sales force, that is kind of a normal application which helped drive efficiency for their business. And I think we’re seeing some of that efficiency now come through. And also like first six months of this year, they had some benefits from reduced travel because of COVID and obviously fewer customer events and such like. So that obviously helped to contribute to the possibility slightly.
In terms of the first half, second half phasing, we are certainly expecting half way to then most like us the Q4 for them, which is calendar Q4 is the biggest quarter, in period, but having their pipeline and deal closure and certainly having seen the first half performance, we believe they’re on track to hit their internal targets for this year. Craig, do you want to pick the first question?
Yes, Michael with regard to how OSIsoft sells a couple of points here. OSIsoft has a very large installed base. You can see that in the maintenance revenue, you also see a small growing subscription revenue base, which is a similar that’s subtly different in certain ways to our flex model, which is allows flexibility in how the customer uses the product. They are structured commercially to encourage the use of PI and the data like customer insofar as, the more people have access to the data the more valuable it is.
With respect to expansion, 10% of their businesses through channels versus and in the case of AVEVA 30%, so, we see that, the go-to-market scale, but the channel brings you is ahead of us. And finally, I’ll talk about, cloud, where as customers are more open to cloud deployment, we’re pleased to see the OSIsoft has and Dr. Kennedy have been investing very heavily in a solution called OCS, which is a very nice data based cloud solution. That product is in the early trials with customers, and we of course are working on how that will work with our AVEVA Connect, which is our emerging cloud platform.
So, just to rewind on how they sell, they have a specialty sellers. The entire team is a specialty sales team. They sell — and then, further specialization into sub-entities, such as sub sectors or verticals such as power generation, such as wastewater where they’ll have specialty sellers, that’s typically how they’ve expanded their, and done a good job of expanding their team. And so finally a point that James mentioned, about six months ago, Dr. Kennedy pulled in some new management, some very good, talented individuals who have, I’ll say about some, similar techniques to what we brought into the combine of AVEVA model, for example, like a deploying sales force throughout the organization, which brings us higher productivity.
Okay. Thanks. And then, just in terms of penetration. And if you take those top 10 customers that have $1 million today standardized on OSI? Or do you often find per distance? I mean any sense of the addressable market size would be helpful?
The total addressable, purely from a historian point of view, which the data market is substantially, but the story in our market is between more than 2 billion. So, they’re pretty, so, there’s a lot of opportunity in the historian market. There’s a lot of opportunity in the data market, the analytics market. And in those customers, you will find that PI is being used. These are large customers.
So you’ll find it like the using a cost suite of power generation facilities, but not consistently, and not all power generation time. So that allows us sort of cross sell opportunity into those accounts. We still see a just pure opportunity for penetration of PI into those accounts. We also see opportunity for us to cross sell into those accounts. Happy, if you could follow-up, to give detail to you.
Our next question comes from James Goodman from Barclays. James, please go ahead.
Good evening and thank you for taking my questions. Congratulations on announcing a deal a couple for me, please. Firstly, just on the reduced oil and gas exposure, which I found quite encouraging. I think that you’ve identified about 35% now, and as the OSIsoft deal. I’d actually anticipate the exposure, that’s a bit higher given the sort of heritage of the business. So, I wondered if you could talk a little bit about the expansion that they’ve had seemingly into to power and utilities being the most important vertical. And whether you can talk about some of this sub-segments this hour or opportunities in that market, which were important to the business?
And second question is just comes to cost synergies, which I know are secondary and important to the strategic and revenue opportunities with the deal. But, I guess, I think it’s easiest to sort of think about and quantify remember when you did the AVEVA and Schneider combination. I think you talked about $30 odd million of cost synergies, if I remember rightly, it was up 10% of the cost base. I just wondered whether that sort of 5% to 10% type cost base and sort of target would be appropriate or whether we’re talking about sort of a similar level of cost synergies in there?
Yes. So on the cost synergies, it’s quite similar to position Schneider-AVEVA merger, in terms of the theories that we expect synergies to come from. We’re in quite a few both of the same cities across the globe, so we can co-locate the people under one roof. And as you heard, we use quite a lot of the same IT systems in service clouds, sales force, MuleSoft and others. So we can tolerate that as well as obviously, Microsoft Azure and development tools as well.
And then, obviously, consolidating the back office functions, finance, the IoT, et cetera, HR, so I think the way to think about it in terms of quantum, we’re still working on that we exclude it and expected but just curious, I guess a sense of direction, it is businesses slightly smaller than the AVEVA as far as Schneider business that we merged with, I think they use that as a proxy for a general sense of the quantum of cost energy.
And James on this point about the end markets, yes, you’re correct. It does reduce our oil and gas penetration in the business. With respect to where OSIsoft has good penetrations, that is power as you pointed out, power generation transmission distribution we still see further enhancements there of further increase around power, especially with Schneider Electric, as which their view of the electrification of the world that electricity is a basic human right, as the build out of power, as it goes from high voltage, medium voltage to low voltage and distribution, we see opportunity there.
We see opportunity in buildings. We see opportunity into data centers, everywhere where electricity flows, we see opportunity for PI. And of course, it’s really about the go-to-market scale also alternative energies. Now, with respect to one of the synergy scenarios, many of you have seen our unified operations center, the 50 meter world. Those unified operations centers are increasingly being deployed in power generation, power transmission or distribution centers.
For this view all of the operational data and of course, in many of those were already interoperating with PI stores, the data sitting in the PI store and when you look at the data over his overtime, you see that coming from PI. And so we, we think that we can provide a higher value proposition to customers of the power industry. Which of course, then leads to the sustainability point that I referenced earlier, where you can run more effectively more efficiently inside all of those power scenarios.
Our next question comes from Charles Brennan of Credit Suisse.
I’ve got two, if that’s possible. Firstly, can you just talk about the relationship with Schneider in the context of this deal? Obviously, a few months ago, Schneider was rumored to be buying OSI. So, can you just talk us through the process of how you’ve ended up acquiring it? And then when I think about the power buyers’ customer base, that would seem to fit nicely with Schneider. Is Schneider already a significant customer for OSI, and is that a big area of opportunity for you?
And then secondly, just on the financial gain, I think we’re in the last year of major benefits of AVEVA moving customers to three year deals. You mentioned the ELA license models of OSI, how far through the process of shifting customers to multiyear contracts, are they — and how much future benefits you’re going to get from that? Thank you.
Sorry, I’ll take the first question here. So you have to — when you think about, when you’re trying to navigate strategic value, you have to think about what each company does. So with respect to Schneider Electric, as they engage in projects around the distribution of Schneider Electric, as I mentioned, industrial solutions or the power or building solutions, if you think about many of those deployments, it’s around the build out of those facilities.
If you think about where increasingly AVEVA is, with a small 10% exception around the CapEx of Greenfield CapEx of oil and gas, mostly it’s around the operational side running those facilities and providing the tools to operate those facilities. And once you think about that, then you can understand how certain acquisitions make perfect sense for AVEVA and certain acquisitions make sense for other companies, including Schneider.
And so in this case, OSIsoft is an operational system. It’s an OpEx model. Its usage is aligned with the consumption model of the customers. And so — and also it works with many, many different industrial firms including Rockwell Automation, including Emerson, including ABB including many, many, many, many more end markets.
And so AVEVA is a perfect sense for OSIsoft. I also say when you think about our relationship with Schneider. We of course, Schneider is a substantial shareholder and we’re pleased with their support, especially as it relates to this transaction. But they’re also a go-to-market partner for us, where they have a very large distribution and very efficient distribution networks. They have over 100,000 employees. And they through that go-to-market relationship, it’s very productive for both us and China. And we also have — from that end in our top accounts where we do for some level of account planning together. It’s a very productive relationship.
I think I answered your question, Charlie.
Yes, thank you.
Yes, just on the second one, Charlie. So quite the thing difference here to AVEVA, I know it’s ourselves, so there are enterprise agreements, they’re actually, their petrol license can pay– sorry, combined with maintenance for at last five years, there’s not really, it’s not in the shelf to the AVEVA model which is a term license for at least five years. Yes, that’s very much ahead of us and that’s part of the opportunity to get that business and move on to subscription type model the flight was done in AVEVA.
[Operator instructions] Our next question comes from Stacy Pollard of JPMorgan. Stacy, please go ahead.
Hi, thank you very much. Just a few for me. First of all, kind of a quick question, what happened in 2017 for OSIsoft? Just curious about that drop in the margin, just wondering what happened there? And then combined margin potential, you’ve talked about 30% for yourself, of course, as a target. How does OSIsoft impact that target given that they’re already looking at 31% I think last 12 months. Do you think that combined — do you think you’d be lifting that combined target to something above 30%? And then the next question in your goal for sort of end to end digital transformation for your customer, what other types of assets would you want to develop or acquire, as you think about your portfolio?
Craig, I’ll take the first two. So, the EBIT drop into 2017 and as I mentioned before, OSIsoft to be investing in Intel systems, as part of their digitalization of their own business, so, that’s through these additional costs from consultancy and IT applications that they expensed in 2017 that resulted in the middle lower margin and three years after that effective cheer to more stable revenue and costs the last 12 months has been has been very strong.
And on the combined margin potential we don’t really more say today on that 30% target that we set still remains. Obviously, this business helps us get to that. And I think we see a lot of potential in driving more margins, higher margins in the OSI business, but we’ll come back to you and later this year, when we when we looked at the margin target as well as obviously, revisiting the recurring revenue target is a really big term for the for the last year and for AVEVA.
Craig, do you want to take the last question?
Yes, Stacy. The question of what other types of assets might you acquire. We have certainly been forthright about adjacencies or markets where we play and where we don’t play and where there’s area for opportunity and one of those areas has been asset performance management. We, think that OSIsoft actually is — ticks a lot of the bar all bubbles that was on the target we’ve shared with you before in terms of expansion around asset performance management. So, we think, there’s plenty of opportunities for us to post transaction what would then become sort of a planning activity to expand our asset management business.
But really pragmatically Stacy, we’re focused on closing the transaction around the end of the year. After that, we’re going to be focused on the integration. We spent 18 months waking up everyday focused on the integration of AVEVA and Schneider Electric software, and delivered very good results as a result of that focus. So, we intend to not get distracted and we very much ensure that that integration goes as good as, if not even better by using our lessons learned from the previous large acquisition.
We now have a follow-up question from Charles Brennan of Credit Suisse. Charlie, please go ahead.
Thank you for taking the follow-up. You talked about OSI being the Switzerland and agnostic from all of the bigger company. I’m just wondering, what do you think the reaction from a Rockwell or Siemens or GE or any of the other companies that may use OSI, may be to the transaction and the relationship with Schneider?
Look, Charlie, I mean, let’s separate between sort of the reality and what our competitors mind say. So, AVEVA has always supported heterogeneous environments. So, we interoperated already today with all of the vendors that you mentioned today, and we work quite happily and well with all of those vendors in our customers, in delivering value to them using information from the interoperability with those systems.
It’s a reality of the world. It’s naturally diverse, as naturally heterogeneous and in the industrial sector, that is of course the situation. So, as we do today with our long-term control software, we interoperate with everybody. It works well. We will do the same here with OSIsoft and we’ll work harder to ensure that not. Just, as I mentioned earlier, when you think of our overall business, really it’s about 10% of our businesses sell to and sell with Schneider electric. But we intend to do that with all different vendors.
And just another point, Charlie is the OSIsoft time business supply PI System business will run as a business unit. We are comfortable with that model where the business unit are given the resources of the broader organization in terms of a go-to-market scale, marketing activity, support for deep levels of research and development and are able to present themselves to the market and the value that they provide.
I would look, we’re not a conglomerate we’re relatively small set of industrial experts. We’re offering us, we wake up every day and we work with our customers in their digital transformation journey and everywhere we’ve done that we’ve worked well. And any sort of, PowerPoint marketing charts sort of from competitive sort of full of full to the wayside because, we will show people within a few days, a few hours, maybe a week or two to show them exactly how we operate with our systems that they already have its one of our great differentiators.
Just broaden the questions to ask about the competitive landscape for OSI more broadly. Can you think of the core capacitors thing, other industrial companies like GE or Siemens? or do you think the core competition’s going to come from a technology led vendor like a Splunk, if we look at the next three to five years?
So, Charlie I think, my view here is pretty clear. One level, look to operate in this sector, you need to be a specialist. You have to understand the industrial footprint. You have to be able to talk about the specifics of gas turbines of distillation columns. You have to have expertise in chemical and process engineering because of those are the customers. So with respect to the large horizontal players, they are very supportive partners and here I’m talking about public cloud platform providers, and we use them, but they really don’t have the depth of understanding of the end market, use cases.
With respect to the industrial firms, they have very deep expertise in their particular systems. But when you stray beyond their systems, they really, it falls off quite rapidly and their depth of understanding about their competitors system. And so, that sort of brings it back to this sweet spot that we’re in, the sort of warm embrace that we’re in that we’re able to partner with a large horizontal providers, for example, to get very cheap access to highly scalable cloud computing or capacity to run deep AI algorithms in the cloud.
But also we’re able to have the depth of understanding around asset frameworks and tagged data around policies and information, and be able to call up a customer and say, hey, in your production system around gas, there an issue in your facility and here’s the issue, and we would have a meaningful conversation around that, and then the realities of operating there. So, that’s I think Charlie, where we have, a strategic differentiator. I don’t think it’s well understood. But certainly, for me, that’s one of the large sort of structural benefits that AVEVA has versus others in the market.
We now have a question from James Moore of Redburn. James, please go ahead.
Yes. Hi, everybody. Thanks for taking the question. I too have some questions about competitive landscape, but Charlie just took some of them. So, I’ll try different angle. You’ve talked about a market structure, 1 billion to 2 billion for that historian market. I thought Wonderware had its own historian business. So, could you size it, when you put them together, if you put them together? Could you talk a little bit about what the market share has done overtime? And specifically to your points about the large industrial player, who I believe ABB, GE, Siemens, Rockwell, Honeywell also play in their historian space? Can you talk about the large industrial conglomerate market shares as the last 5 or 10 years? And is it true that independence of said better, I’m thinking of you guys and Iconix. And could you just give me a little bit of flavor for who the main competitors are in the current market and what their market shares are, please?
James, quite a deep question, I’d be happy to take it and follow-up. Let me sort of maybe not satisfying to the question, but very broadly to answer the question. I think there are two approaches to the historian market. One is where historians are embedded with, you buy some piece of equipment and you get a historian with it, which is a reasonable thing to do, where you’re capturing the time and the data for that piece of equipment. And so, you’ve seen some companies who have built their own versions of that, perhaps doubles the things of our companies. And, but you see sort of these sort of fractured end points of historians from multiple vendors.
And then you see a sort of pure play. So, horizontal players like OSIsoft, who just wake up every day and that’s what they think about, and they’re very, very good at it. And look, what we see is that, to build a software business, you have to run as a software business. You can’t do it — it’s not a weekend sport. And so, it leaves that level of expertise, perhaps over 5 years, over 10 years in the case of OSIsoft over 40 years to build that depth of expertise and footprints. And so, of course, we think that the sort of players like OSIsoft, are the winners in this situation.
But let’s, the market is really broader than the historian, the market is about what you do with the data, the analytics around the data, the use cases around the data. It’s really not just about someone putting on a PowerPoint chart, they can store time based data. It’s about, on the more data you have and the more you can close the data belongs to the customer. It doesn’t belong to the industrial provider, it belongs to the customer. And the more you can help the customers and use that data to do something transformative, while reducing their operational expense, the better for the customer and for yourselves. But look James, I’m cognizant that high level responses, we’ll go into more detail with you off-line.
Maybe if I could just ask add. How big do you think the data analytics market is currently and how fast you think it’s growing?
The data analytics market is, I mean, it’s well written. It’s 10s of billions of total addressable market.
We have a question from Michael Briest of UBS. Michael, the line is yours.
Just a couple of follow-ups and then you talked about accretion in 2022. Is that including the tax benefits? And can you just walk through again, why the tax rate comes down to how long so we get a sense of the intrinsic value? And then just on the interest rate on the debt, have you any sense on where that was partly to come on or what you’re assuming that 2022 accretion scenario?
Yes. So, the accretion in FY ’22 does include the tax benefits, but as for synergy that’s what we recall that in the statement. The tax benefit basically well-established in U.S. tax law that you get a step up in the value of the assets you’re acquiring. Essentially, it’s affecting the goodwill that you create. And under U.S. tax law, you basically can write that goodwill off for tax purposes over 15 years straight line, and tax is up to against your profits. And in our case, not only against the OSI profits, but also against the AVEVA profits because we will have a U.S. tax group. So that’s basically the mechanics on how it works. And on the interest rate — the interest rate on the term loan is a little less than or just under 2%, so you factor that into your model.
[Operator Instructions] We have no further questions on the line. But we’ve now received a question from Balajee Tirupati of Citi. Balajee, please go ahead.
Hi, this is Balajee Tirupati from Citi. Two, if I may? First, could you kindly talk about the proposed financing structure? Given current low rate environment, why are you stocking a sub two times balance sheet debt leverage? And what is your threshold leverage level? And second question on potential regulatory approvals. Could you talk about approvals you may require? And do you see a risk to the deal [indiscernible]? Thanks.
I’ll pick this up. So, in terms of finance structure, the business has not had leverage in it before. We think around two time is definitely manageable given the strong cash generation profiles of the enlarged group. And — but philosophically, we still want to run this business and net cash we anticipate deleveraging over the next three years or so and back to net cash. So, we could have more depth in we chose, but frankly, we want to be relatively conservative and to get back to net cash.
In terms of conditions for closing, there are antitrust filings that need to be made across the territories. We think that should be relatively straightforward. We’ve done the announcements already and we start filing those noted, since Action has been signed. And we also need to make a filing of CFIUS in the U.S., similar to what we have to do on AVEVA-Schneider merger. And again, we’re not anticipating any terms there, so that is on the regulatory approval.
We have no further questions on the line. So, I’ll hand back.
Thank you, Jordan. So thank you for your interest. The circular and prospectus to approve the transaction and launch the proposed rights issue is planned to be published in October or early November, with closing again expected to take place around the end of the year.
I hope you can tell that we believe this is an exciting and important step that further strengthens AVEVA’s position as a global leader in industrial software. It enhances AVEVA’s ability to accelerate the digital transformation of the industrial world and promote a more sustainable world.
We’re very excited about what we’re — this transaction and we’d be happy to chat more with you outside of call about it.
With that, operator and team, thank you for your interest.