Atalian: Waiting Room
All,
Please find our slightly altered analysis here.
Bond investors have been promised a deleveraging transaction along the lines proposed by management back in 2018. However, with bond yields at 12% there is significant scepticism about the level of deleveraging and potential success of the exercise. The odds of a successful deal have deteriorated after underwhelming results in Q421, alongside lower margin expectations for 2022. Atalian is trying to satisfy institutional investors that it is doing enough to reduce leverage as promised in 2018 whilst giving up as little equity as possible. Why not wait until performance improves as management expects?
Atalian faces labour cost inflation which it will need to try and pass on to clients. Those same clients, particularly in the Retail and Office space are facing pressure on utilisation levels and are not going to be enthusiastic about paying more. The travails in the US business and lockdowns in Asia point also to slow EBITDA growth in 2022. Management will need to sell “normalised” 2023 EBITDA/margins to any buyer if they are to get within sight of their target leverage.
What has Atalian promised?
- €200m in fresh capital by “Summer 2022”
- When first mooted in January 2020 the range was €200m- €300m.
Can Atalian raise €200m via a minority stake?
- We are sceptical about the attractiveness of Atalian to a potential minority investor right now.
- The Julian family will not want to give up control. Our take is that the family will be willing to give up around 30% of the business. €200m for a 30% stake would imply an equity cushion of ~€650m. An incoming investor will also want to have some control especially given previous governance issues.
- Atalian is expecting top-line growth of 4% - 6% in 2022/23 along with EBITDA margins of 8% by 2023. This equates to €260m in EBITDA in 2023 (vs €142m in 2021). At that level of EBITDA €, 200m would be around 30%, however, our modelling has margins closer to 6% giving EBITDA of €188m and an equity cushion of under €100m.
- The poor performance in International (Covid in Asia, management in US removed) is going to hurt valuations.
Why is cash being raised?
- Institutional investors have been unhappy about the level of debt at Atalian for some time and want to see fresh capital to reduce leverage. Since the previous management was ousted in 2018, there has been pressure to reduce leverage before any further acquisitions.
- At the company capital markets day in January 2020, Atalian committed to raising €200m - €300m of capital to reduce leverage to ~4.0x. The exercise was targeted for execution in 2022.
- The target date has now been firmed to “Summer 2022”. Management referred to a €200m figure on the Q421 conference call.
Who are the potential buyers, and will they bite?
- Private Equity has been invited to look at the equity. The process of choosing a partner must be well advanced if the summer is still being targeted.
- Private equity investors will want to structure any investment to be in pole position to take overall control of the business in the event of any restructuring. A subordinated PIK/Preference note would make the most sense but would reduce their control in the short term.
- The 2024/25 maturities will need to be addressed. Atalian has another 12-months to make progress toward its 8% EBITDA margin target. If the €200m is raised it will be burning a hole in the company’s pocket and there will be pressure to bring forward the refinance. However, the same issue of selling 2023 Margins in 2022 will face bond investors.
Is €200m enough?
- €200m is not sufficient to deliver 4.0x leverage.
- Using Sarria’s estimates for Revenue and EBITDA margins with 2023 as a base year, we see leverage >6.6x with the €200m raise. If we use management guidance, we can get to around 4.7x PF. Atalian is targeting 8% margins within 2-years, this is well above the 6% in our model. If we split the difference, we are still at leverage above 5.5x.
- If non-Recourse (factoring) is excluded that falls to 4.7x (or 4.1x if the capital raise is €300m).
- Atalian’s definition of Net Financial Debt excludes non-recourse debt, but its definition of leverage ratio does include non-recourse debt. It would be surprising if Atalian doesn’t use the lower figure, but we think it is worth pointing out.
Positioning
- We have been looking at Atalian as a potential short for a while but failed to position ourselves earlier this year. Now, the existing bond yields of c12% already reflect market scepticism that a deal is going to happen soon. We would see a recovery into the 90s as an opportunity to build a short position then.
Atalain Cap Mkts Day Presentation Jan 20
As always, we look forward to discussing this with you all.
Regards,
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055