Velan Inc. just endured a very public rejection. Flowserve Corporation, after initially proposing a seemingly beneficial acquisition, backed out, leaving Velan to pick up the pieces. While the surface narrative focuses on Flowserve's inability to secure French regulatory approval, a deeper dive into Velan's recent financials, coupled with the curious timing of a specific subsidiary purchase, suggests a more intriguing story - one of potentially undervalued assets and a possible path to independent success.

Let's talk numbers. Velan, despite operating within a challenging environment, has managed to maintain a healthy backlog, a testament to the enduring demand for its critical flow control products. At $485 million, the backlog provides a degree of revenue visibility, especially with $361 million expected to convert within the next year. This, however, is not the most fascinating detail.

Buried within the financial statements and glossed over during the Q3 2024 earnings call is the revelation of Velan's full acquisition of Segault SAS, its French subsidiary. Previously holding a 75% stake, Velan purchased the remaining 25% for a mere $5 million. This seemingly minor transaction, completed just before the Flowserve deal fell through, might hold the key to understanding the French government's decision and, more importantly, Velan's future.

Why would the French government block a deal that, on the surface, promised the consolidation and potentially enhanced stability of a strategically important manufacturer like Segault? Could it be that the perceived risks cited by the French Ministry of Economies stemmed not from a fear of foreign ownership, but from a belief that Segault, under Velan's sole control, represents a more valuable, strategically autonomous entity?

Consider this: Segault, specializing in valves for the nuclear industry, operates within a sector deemed critical by the French government. France, heavily reliant on nuclear power, has a vested interest in ensuring the continued strength and independence of its domestic suppliers. It's plausible that allowing an American company like Flowserve to absorb Segault raised concerns about potential foreign influence over a key industry player.

Furthermore, the timing of Velan's 100% acquisition of Segault, occurring during the Flowserve due diligence period, suggests strategic foresight. It's possible that Velan, recognizing the inherent value of its French subsidiary, made a calculated move to secure complete control, anticipating the deal's potential collapse.

Segault's Revenue Contribution and Potential

Now, let's delve into the financial implications. While specific details regarding Segault's contribution to Velan's overall revenue remain undisclosed, previous statements indicate the French operations contribute a significant portion, potentially between 25% to 30%. If Segault, with its niche focus on the robust nuclear sector, consistently outperforms Velan's other divisions, the $5 million price tag for the remaining 25% stake seems almost absurdly low.

This raises the question: Did Velan, through this acquisition, inadvertently uncover a gold mine? Is Segault, operating within the French nuclear ecosystem, poised for substantial growth, growth that could potentially propel Velan back to profitability and beyond, even without Flowserve?

While it's still early to declare a definitive verdict, the confluence of these events - the seemingly low-ball purchase of Segault, the French government's opaque reasoning for blocking the Flowserve deal, and the enduring demand for Segault's specialized products - paints a picture of intriguing possibilities.

Perhaps the Flowserve rejection, while initially a setback, provided the catalyst for Velan to recognize and capitalize on the true value residing within its French subsidiary. Perhaps, just perhaps, the ghost in Velan's machine - Segault, operating under the radar - holds the key to a brighter, independent future.

The coming quarters will undoubtedly reveal if this hypothesis holds water. However, one thing is certain: Velan's story, far from over, has taken an unexpected turn, one that demands a closer look from investors and industry observers alike.

"Fun Fact: The global market for nuclear valves is expected to reach $2.4 billion by 2028, driven by factors such as the increasing demand for clean energy and the replacement of aging nuclear power plants. Could Segault be a key player in this expanding market?"