Atalian – Groundhog Day
All,
Please find our unchanged analysis here.
Ahead of its 23Q1 results on 26th May, we heard last week that Atalian has appointed advisors regarding debt refinancing in 2024 and 2025. These days there is not much equity value in the business, and we think there is still a downside to the bond price from uncertainty about Atalian's ability to refinance itself. An equity injection seems very unlikely, so the next step should be an Amend and Extend offer involving the cash raised from CD&R. Success will depend on whether Atalian can convince bondholders customers will wear higher costs in France, and that the company can control the losses in the US. With so much cash on hand, we see a Sauvegarde solution as unattractive to the shareholder.
Investment Considerations:
- Atalian bonds are a bet on receiving 50c/€ in cash from the recent sale of the UK unit and on the remainder of the business being worth something north of 20c/€ when a stub is extended to 2028 and beyond.
- Until we see current performance bottoming out, however, the latter half of the equation is hard to determine, as is, so the amount of cash Atalian should hold back to guarantee that the going concern survives post-deal.
- For that reason, we find it early to invest in a deal, albeit one that we think will look very attractive in the end. We find it odd that Franck Julien has just replaced his CEO and is now rumoured to have called in advisors. - On our modelling, we find it impossible to uphold management guidance for the year, and we are cautious about the forthcoming results and the message management will send.
Our model points to an upside in bond value:
- FV of the bonds is 94c/€:
- Cash 54c/€
- DCF value of the business is 40c/€
- Value falls to 86c/€ if there rescheduling, giving bondholders 50% of the equity and a €380m note:
- Cash 54c/€
- New note face value 25c/€
- 50% of the equity 7c/€
What options does Franck Julien have?
- Atalian has €1.2bn of bonds maturing between May-24 and May-25. All three outstanding notes mature within a year of each other and should have significant x-holdings, so will likely need refinancing simultaneously. EV, however, has dropped significantly and breaks well inside the SUNs.
- Before the disposal of the UK and Japanese businesses, Atalian had proposed an equity raise to reduce debt, but this is now unlikely.
- Amend and Extend: 54c/€ in cash + 41c/€ in new bond => 95c/€ recovery. Main terms; €650m repaid at par pro-rata, remaining outstanding rolled into a new €600m 5-year bond with a 10% coupon, a security package with charge over proceeds loan.
- Pay off the May-24 bonds and deal with the May-25 notes separately: An aggressive move which seems unlikely to work. The maturity gap between the securities is not long enough for an improvement in the business environment to help a refinancing. Also, the likely x-holdings between the issues make getting bondholders to agree will be difficult.
- Apply for Sauvegarde, and look to get a better deal for equity via a court process. A more expensive and riskier route for the company could threaten the retention of equity control. With a net cash position ahead of the SSNs, a court would have to be very technically minded to sanction a scheme to cram down the SUNs, which would otherwise run riot and take over the business.
Q1 Results will give us a better view of the FY:
The French business is struggling.
-The balancing figure for €18m in expected 2023 EBITDA headwinds in the Atalian FY22 presentation is €20m+ in productivity gains. How Atalian intends to deliver these gains is not clear, but is crucial in reaching FY23 guidance.
- Atalian claimed in the FY presentation that it was on course to get a 3% price rise from indexation for the FY in France. Management expects this to translate to €5m in additional EBITDA.
- Lost Contracts and Renewals are guided as a €12m EBITDA headwind (this equates to €130m of top-line attrition). There are further €11m in negative impacts to EBITDA that are not specified.
USA, stick or twist?
- Atalian is looking at all options, including closure. EBITDA will be positive, but continued difficulty means Q1 will be lossmaking at the EBITDA level.
- Getting indexation rises on contracts to restore profitability is easier said than done. We do not think that Atalian's customers will simply roll over on indexation rises. Unless contracts already have provisions, Atalian may find that restoring profitability in US contracts will take longer takes longer than hoped.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055