Axalto and Gemplus to Combine to Create a Global Leader in Digital Security

The boards of Axalto N.V. and Gemplus International S.A., both leading digital security providers, have unanimously approved the terms of a recommended merger of equals to create Gemalto.
OPiou_AMandl_med.jpgThe transaction will be structured as an exchange offer by Axalto for Gemplus, with an exchange ratio of 2 Axalto shares for every 25 Gemplus shares and a distribution of € 0.26 per share to be made pre-offer by Gemplus to its shareholders.

The distribution represents an amount of approximately € 163 million based on current Gemplus shares outstanding. Texas Pacific Group and the Quandt family entities, Gemplus’ largest shareholders representing in aggregate 43.7% of Gemplus’ share capital, have agreed to contribute their shares to Axalto prior to the launch of the offer at the same exchange ratio.

With expected combined 2005 pro-forma revenues of € 1.8 billion (US$ 2.1 billion), the combination will create a world-class leader in digital security. The combined companies will have operations in over 50 countries, will have large operational centers in the Paris and Marseille areas and employ approximately eleven thousand people. Gemalto will be registered in the Netherlands.

Transaction Highlights

  • Merger of equals to create a world class leader in digital security

  • Combined entity in a strong position to address growth in core markets and new applications

  • Broader client base

  • Combination of intellectual capital and focusing of R&D and Sales & Marketing resources on new application development and superior customer service

  • Strong and shared governance, shared and strengthened management team

  • Significant identified synergies, estimated to have a net impact on operating income of approximately € 85 million (US$ 100 million) per annum by the third year after closing on a fully phased basis

Business Rationale

gemplus80.jpgGemalto believes it will be in a strong position to capture future industry growth. In particular, the combined R&D and Sales & Marketing efforts should create a compelling platform to develop new markets and pursue high growth opportunities, such as Identity, ePassport, Healthcare, IT and corporate security, and payments. Furthermore, in its largest product lines of mobile communication and banking, the combination is expected to allow faster development and commercialization of high-end products. Gemalto anticipates benefiting from enhanced scale, translating into improved manufacturing processes, efficiencies in the supply chain, and greater ability to support client-dedicated projects. Gemalto believes that following the combination, it will be in a better position to service its broader portfolio of clients with an enhanced local presence and an expanded product range. In addition, the combined company should benefit from higher visibility in the capital markets.

Alex Mandl, Gemplus’ President and CEO said: “This transaction is an important development for Gemplus, Axalto and the digital security industry as a whole. This merger, with a sound industrial logic, is a win-win that will create value not only for our respective shareholders but also for our clients and employees. We are confident in our ability to deliver significant value to our shareholders.”

Terms of the Transaction and Transaction Process

The transaction will be executed in two steps. Texas Pacific Group and the Quandt family entities, Gemplus’ largest shareholders, have agreed to contribute their shares to Axalto at an exchange ratio of 2 Axalto shares for every 25 Gemplus shares. Immediately prior to this contribution in kind, Gemplus will distribute € 0.26 per share to all its shareholders including Texas Pacific Group and the Quandt family entities. The contribution in kind and distribution are subject to anti-trust and other regulatory approvals, the approval of shareholders and certain other customary contractual conditions.

Following the completion of the contribution in kind, Axalto will launch a voluntary public exchange offer for the remaining Gemplus shares at the same exchange ratio of 2 Axalto shares for every 25 Gemplus shares. Gemplus shareholders will receive in total, assuming full acceptances, approximately 50.2 million newly issued Axalto shares, representing 55.4% of the outstanding capital of the combined group, with Axalto shareholders representing 44.6% of the share capital.[1]

The exchange ratio, taking into account the distribution payable to Gemplus shareholders, represents a nil-premium transaction when measured on a 30-day trailing basis.

The transaction has been unanimously recommended by both Axalto’s and Gemplus’ Boards of Directors.

Synergies, Financial Benefits and Integration Planning

Axalto_s.jpgManagement of the companies expect to realize joint annualized net operational synergies of approximately € 85 million (US$ 100 million) by the third year after closing on a fully phased basis. Most of these synergies will accrue from volume effects, supply chain efficiencies and sharing of best practices. Gemalto anticipates limited job reductions in its R&D and manufacturing base due to current high capacity utilization and the need for further human capital to service the anticipated industry growth. The anticipated one-time IT, relocation and other restructuring costs necessary to realize these synergies are expected to total approximately € 43 million (US$ 50 million).

The proposed overall integration strategy has been jointly formulated by the two management teams. As part of this process, appropriate information or consultation, as the case may be, will be provided to staff and employee representative bodies in the relevant jurisdictions in accordance with local legal requirements. Implementation is expected to commence following shareholder and regulatory approvals and the completion of the contribution in kind.

In light of the strong financial position of the combined group, it is the current intention of both CEOs to recommend to the Board of Gemalto that a share buyback program covering up to 10% of Gemalto shares be instituted post-closing.

Olivier Piou, Axalto’s CEO said: "This merger is wholeheartedly supported by both management groups. Once shareholder, regulatory and other approvals have been obtained, the combined management team will rapidly implement the combination and integrate Sales, Marketing, R&D and Manufacturing on a global basis. A major priority of the Board and management of Gemalto will be to achieve a successful and expeditious integration of Axalto and Gemplus that preserves the key strengths of the culture, management and business practices of each group and allows the efficient realization of the expected synergies.”

Balanced Merger of Equals

Alex Mandl, the President & CEO of Gemplus, will assume the position of Executive Chairman and Olivier Piou, the CEO of Axalto, will be the CEO of Gemalto. Mr. Mandl and Mr. Piou will jointly constitute the Office of Chairman that will be responsible for Integration, M&A, Strategy, Budgeting and the top 30 managers. Frans Spaargaren will assume the position of Chief Administrative Officer with responsibility for integration, procurement, supply chain and IT, and Charles Desmartis will be the Chief Financial Officer of Gemalto, with both reporting to Olivier Piou. The Board of Directors of the combined entity will be comprised of 11 members, 5 proposed from the current Axalto Board, 5 proposed from the current Board of Gemplus and 1 other independent member will be jointly nominated.

Trading Update

Each of Axalto and Gemplus has stated that, for the financial year 2005, they expect to report revenues close to $ 1 billion, and € 0.95 billion respectively, and operating margins of approximately 8% each.
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