Atos - Not all ingredients in place.
All,
Please find our updated analysis here.
We have delayed writing on Atos and the collection of offer letters as we see none of the proposed offers having any chance of success. These offers are opening gambits and we expect a further disclosure from the Company in the coming days or weeks. All the current offers have their flaws but our biggest concern with Atos is the underlying business performance and the lack of cashflow even in the management projections offered by the Company.
Investment Considerations:
- With over €550m of cash outflow before debt servicing expected in the next two years, we strongly suspect the debt burden left on the Company post-restructuring will be less than that proposed by management.
- Any investment in Atos is all the more difficult because the French state has tabled a bid for a sub-division of BDS (Big Data & Security). Although we don’t have specific operating margins and cashflow for this particular sub-division, BDS is expected to be the largest cashflow generator in FY25 and FY26. As it currently stands, the French state have issued a non-binding letter of intent to acquire this division.
- Although all creditors appear to be pari-passu, the courts and/or the Company may decide to create a separate creditor class (factoring lines or under various restricted lien baskets, in order to have another creditor class to vote in favour of a plan which would cram down the majority of creditors. That we are seeing such a wide open sales process and bids structured that do not compete for the majority creditors' favour suggests that some constituents - including management and the administrator - perceive such an “opportunity”. Why would they bother, if without it the Company would be virtually bound to accept the creditor proposal anyway?
- For the above reasons, and despite the current levels in the market, we are not taking a position. For now, the creditor position represents mostly an option and the bonds are not yet pricing that way.
The Proposals
OnePoint/Walter Butler:
- Capital Structure post-completion would result in €1.3bn of 1st lien debt, €1.45bn of 1.5 lien debt and €350m of 2nd lien debt, resulting in Gross debt of €3.1bn and €1.9bn of cash. Note the cash will be reduced by €500m of further working capital management reversal and €1bn of negative cashflow over the coming years, resulting in Net Debt of €2.7bn by end of FY25.
- We see this as over-leveraged versus the targets expected by the Company.
Creditors Proposal:
- Leverage willl be even higher under this proposal as the creditor proposal is not writing off as much debt. Senior debt to be €1.2bn, with €3.1bn of reinstated debt, leaving Gross debt of €4.3bn. Cash is also lower in this example, of €1.7bn, and is subject to the reversal of the working capital management and negative FCF over the coming two years, resulting in Net Debt of €4.1bn by end of FY25.
- This proposal is the weakest of the three and is probably only included in the options because it is the creditors who have proposed it.
EPEI/Attestor:
- Envisaged to be the lowest Gross and Net leverage proposal, as under this option there is a significant debt write-off. Gross leverage ends at €1.7bn with €1.9bn of cash (less the €500m and €1bn of working capital and negative FCF), resulting in Net Debt of €1.3bn as of the FY25.
- Note, we are not including the contingent Payment/Debt that is envisaged under this proposal which is expected to benefit from the divestment of the Digital assets.
- It should be noted that this proposal is also flawed as it contemplates the break-up of the Company, likely against management’s own view.
- While management may not like it, we would expect this to be Mme Bourbouloux's preferred option.
The Bigger Problem:
- Cashflow, or the lack of it. Ultimately, recent results and the deterioration in the book to build in Q1 is a huge concern for us. Clients are delaying signing contracts which has resulted in book-to-bill at 47% for Tech Foundations, and 64% overall, down from 73% in prior years, which is partially explained by the financial uncertainty surrounding Atos.
- Operationally, organic revenue has declined by c. 2.5%, with Eviden declining by 4%. Eviden’s operating margins have declined to 2%, down 330bps organically. Tech Foundations had a marginally better operating margin, but still languishes at c.2%.
- Cash balances have reduced to €1bn from €2.4bn at year-end, reflecting a €1.3bn unwind in working Capital actions. But this leaves a further €500m of working capital reversals yet to happen. This coupled with the budgeted €1bn of negative FCF in FY@4 and FY25, a lot of the proposals appear to have too much debt post-restructuring.
The Next Steps:
- The Company have stated that they are working towards a final financial restructuring proposal to be presented by May 31st. However, we suspect that there will be an interim announcement prior to this date to try to bring the three distinct proposals closer to a workable solution. The only certainty around such an announcement would be that it would include further bad news and adjust views downwards.
- We have not mentioned Bain Capital's proposal, which is not been pursued by the management as not dead in the water. All of the remaining proposals are sub-optimal from the Company’s point of view and to ensure some competitive tension we suspect Bain Capital are still part of the discussions.
- In the meantime the Company is running out of cash and has agreed further interim financing (in-principle). We have not been told by management how the €100m of new bond from a group of bondholders have been provided and more importantly how they are ensuring it is treated as super senior borrowings. Discussions still continue on a €300m factoring facility. Again, we fear that (although we don’t yet know how) these new funds could combine to a new super sr. creditor class that compromises the position of the majority creditors.
In conclusion, we still see it as too early to enter into a position on Atos at the current time. The proposals should be viewed as opening gambits but the final restructuring proposal may not bear much resemblance to these.
Happy to discuss.
Tomás
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk