October 11, 2021

Breakingviews: French cloud IPO is a bet on EU tech sovereignty

by Breakingviews.

Occasionally the initial public offering market throws up a bargain. Octave Klaba would say that’s the case with OVHcloud, the IT infrastructure company he’s floating in Paris for up to 3.7 billion euros. Yet the shares are only a steal if a push for European technological sovereignty turbocharges its top line.

Like Amazon.com and Microsoft, Klaba’s company sells computing power and storage space to businesses and governments through its 33 data centres. Its IPO price range, unveiled on Tuesday, seems relatively cheap. At the top end, OVHCloud’s enterprise value will be 4.1 billion euros, or 5 times next year’s expected revenue, according to a person familiar with the deal. Companies in the BVP Nasdaq Emerging Cloud Index on average trade at 16 times forward sales.

One explanation for the gap may be Klaba’s tight grip on the company. His family owns 79% of the voting rights and will keep control after the listing, giving new shareholders little say. In 2020 and 2021, OVHcloud sold three businesses to groups controlled by Klaba. It also buys metal components and leases land from Klaba family companies, though it says those deals were negotiated on an arms-length basis.

A comparatively sluggish top line also justifies the valuation discount. OVHcloud’s revenue grew at a compound annual rate of 15% between its 2017 and 2020 financial years, compared with 35% to 40% for the wider cloud market over a similar period. That’s largely because it has historically specialised in a slower-growing part of the industry called “private cloud”, where customers rent their own dedicated servers rather than sharing with others.

But a push for greater data sovereignty could tilt things in Klaba’s favour. While U.S. companies like Microsoft and Amazon currently dominate the cloud market, European commissioners such as Thierry Breton are keen to make the bloc more self-sufficient in digital services. Brussels already has stricter privacy laws than the United States and could seek to impose tougher standards on data transfers to America, encouraging European companies to use continental providers like OVHcloud instead. That makes its IPO a cheap way for investors to bet on the decline of globalisation.


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