The proposed merger between French electrical giant Schneider Electric (SCHN.PA) and Britain's energy industry software provider Aveva (AVV.L) has been called off. The companies said the deal was too “risky and expensive.” They said talks were being called off under mutual consent and no break away fees is involved.

The two companies inked a non-binding agreement in July by which Aveva would have got Schneider’s industrial software business and 550 million pounds or about US $834 million (AU$1.16 billion) in cash at the current exchange rates, reports Reuters.

Aveva was founded in 1967 as a spin-off from Cambridge University and makes software for designing oil rigs, ships and nuclear power stations. Schneider is into electric components and energy management systems.

“The anticipated uplift in shareholder value was unlikely to have been realised to the extent previously considered,” Aveva said.

In a reaction, Kepler Cheuvreux analyst William Mackie said scrapping the deal is a good move by Schneider.

“It avoids pursuit of a complex industrial software strategy and consent to a premium price at a time when Aveva's core markets are experiencing deteriorating demand,” the analyst noted.

Risk element

For Aveva, the merger was posing the risk of reducing its exposure to oil and gas markets, which is 45 percent of its total revenue. That segment is already under pressure from falling oil prices and low demand in rigs design work.

“The risk element got beyond bearable from our shareholders' point of view,” Aveva chief executive Richard Longdon told the Telegraph . He said the software assets that Schneider wanted to merge with Aveva were very much intertwined with Schneider. Separating them as a freestanding business was more complicated than originally envisaged, he added.

Integration challenges

“During the due diligence process, significant integration challenges were identified that could not be overcome without considerable additional risk and cost,” Aveva said in a news release, added New York Times.

The news of scuppered deal tumbled the share price of Aveva by nearly 36 percent in London on Tuesday. Aveva maintains that the highly complex structure of the proposed transaction will not help in giving the anticipated boost to shareholder value than previously envisaged. The deal would have given Schneider Electric a 53.5 percent stake in Aveva with the transaction becoming a classic case of reverse merger under the UK takeover rules.

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