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The combined company would be a value-creation machine in any language
Thursday 03 Sep 2020 Author: Steven Frazer

Investors in language translation software developer SDL (SDL) have a decision to make after the company agreed an all-share takeover by RWS (RWS:AIM).

RWS is a provider of language localisation and intellectual property (IP) support services. It is the seventh largest company listed on the AIM junior market, with a £1.76 billion market value.

Under the terms of the deal, SDL shareholders will be entitled to 1.2246 new RWS shares, valuing the total market capitalisation of SDL at £854 million, a rough 52% premium to the firm’s value the day before the tie-up was unveiled.

The takeover looks likely to receive widespread backing, with investors representing 38.2% of SDL already on board. It also looks meaningful that negotiations have begun with SDL’s chief executive Adolfo Hernandez and chief finance officer Xenia Walters regarding their departures.

SDL shareholders must decide between selling in the market now and banking the cash or sticking with what should be a value-creating business in the future. We suggest SDL shareholders vote in favour of the deal and keep their RWS shares. The full offer document is expected before the end of September.

Higher margins, complementary client bases and significant cost synergies worth an estimated £15 million a year are seen by RWS management and analysts and these are compelling reasons for the tie-up. SDL has also invested substantial sums over the years into its own technology platform.

Beyond the £15 million estimate, RWS expects further margin improvements and revenue synergies by using SDL’s technology and cross-selling, according to Peel Hunt analysts.

The combined company, which will remain on AIM, will have in excess of 6,800 staff and is expected to generate £131 million of earnings before interest, tax, depreciation and amortisation (EBITDA) before synergies, on roughly £732 million of run-rate revenues. It will also be debt-free with considerable borrowing capacity to invest in the business both organically and through further acquisitions.

‘It will have broader capabilities across a range of language services, language and content software and IP services, combining RWS’s technical translation and localisation capabilities with SDL’s software, machine translation and AI capabilities,’ says Amir Fattahi, an analyst at technology website Megabuyte.

Despite the strong share price run for SDL this year, RWS has delivered significantly more shareholder value over the past 10 years.

Under the guidance of executive chairman and 32.8% shareholder Andrew Brode, RWS shares have produced an average annual total return of 29% for shareholders. SDL’s equivalent return of just 3.1% is below the 5.25% of the FTSE 100, according to Morningstar data.

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