Atos - Now it is Creditors turn.
All,
Please find our unchanged analysis here.
Our initial thoughts on the Atos presentation yesterday morning have been that operationally, projections are very ambitious and difficult to justify. Therefore, the level of debt reduction, in whatever format it ultimately arrives, looks too conservative. We would expect some of the creditor/shareholder proposals to be more aggressive on debt reduction, and as always in these cases, the providers of fresh cash (either in equity or debt form) to take the majority of the equity.
Investment Considerations:
- There are many unanswered questions before investing in Atos, but it is clear that any credit or equity investor needs to be able to provide additional investment in terms of debt or equity to protect from heavy dilution.
- The bonds have moved up a couple of points since the announcement, but the current levels confirm our view that the projections are too optimistic and we expect that there will be even greater debt write-offs above what the Company are projecting.
- Given the time horizon we would expect in any such investment, investors should expect 2x their initial investment including new money, and even at these low levels, this is difficult to envisage our any reasonable forecasting.
Plan Parameters:
- Atos are seeking €1.8-€2.4bn of debt reduction (37c to 49c) with the balance extended for 5yrs. However, with additional liquidity required, €600m minimum plus €600m of additional liquidity via RCF/bank guarantees, we would expect further debt reduction will ultimately be required.
- Atos has an agreement in principle on interim short-term financing, c. €450m, from various sources, including the French state to the tune of €50m, to ensure sufficient liquidity. Terms have not been made public. The involvement of the French state was expected and re-emphasised by the Chairman, Mustier saying that the government may decide to acquire a minority stake in Atos.
- However, they are seeking new long-term facilities in a combination of €600m in new fresh cash (debt or equity) and €600m in RCF/Bank guarantees to provide additional liquidity. This is a minimum to ensure the survival of Atos.
- The Company are seeking proposals from all their stakeholders on how to achieve this debt reduction, either in the form of debt for equity swap and significant dilution, fresh new equity or a combination of both. Atos have allowed until 26th April for due diligence and outline of proposals from investors.
Operational Forecasts:
- Operational projections from the Company follow the standard restructuring pitch from companies in a similar situation, the fabled “hockey stick” growth trajectory. Combined, Atos is forecasting a modest decline in FY24, followed by a turnaround of c. 5-6% revenue growth and more importantly, margin expansion from 4.1% in FY23 to 10.3% in FY27.
- This is primarily driven by their Eviden business, which is expected to grow c.10% on a revenue basis, with margin increasing from 5.5% to 12% in 2027. Tech Foundation revenue growth is more subdued, with a decline expected in 2024 and 2025, followed by modest growth for 2026 & 2027. Operating margins are projected to grow from 2.7% to 7.8%, albeit some contraction in 2024 & 2025.
- There is no doubt that the core markets of Eviden’s sub-divisions are set for 10%+ growth CAGR over the next couple of years, but we have reservations that Atos are best place to capitalise on this growth.
- Growth rates in the underlying Tech Foundation business are lower, but still healthy at between 5-10% depending on segment. Our concern around the value of the Tech Foundations business remains. Atos is forecasting operating margins to expand to c.8% from the current 2.9% (albeit forecasting a reduction in margins in FY24 and FY25), this higher margin of c.8% does not tally with the low valuation put on this business in the proposed sale to Kretinski.
Cashflow:
- Combining the two businesses, OMDA (Operating Margin before Depreciation and Amortisation and lease payments), is expected to be €754m in FY24 growing to €1.5bn in FY27 driven by the factors above. However, with elevated CAPEX of c. €250m p.a. plus an increase in CAPEX for the Jupiter development in FY24 of c.€200m, cashflow from operations will only reach €330m in FY24, increasing to €1.1bn in FY26 & FY27.
- Restructuring costs and other cash items reduce this further, resulting in FCF before interest and tax being neutral in FY24, and only €200m in FY25. As a result of interest and other restructuring costs (separation and acquisition-related), there is a cash requirement of c. €400m in FY24 and €200m in FY25. forming the basis of the new money requirement.
- With this cashflow profile, the debt level is not sustainable leading to the ultimate conclusion that Atos needs some debt forgiveness.
- Atos are seeking between €1.8bn - €2.4bn of debt reduction depending on whether the €600m fresh liquidity is provided by equity or debt, to match a BB credit profile in FY26 (< 3.0x leverage by FY25 and 2.0x by FY26). In addition, the Company are seeking a 5-year debt extension for the residual.
Potential Debt Options:
- The initial request from Atos is c.€2bn of debt write-down required from c. €4.9bn currently outstanding, equity holders will be severely diluted. However, our view is that the operational projections are very bullish with projected operating margins significantly higher than any achieved by the Company in the past, and we expect that debt reduction may need to be greater.
- We do see an opportunity, for shareholders to provide some equity to preserve/increase their equity stake, however, this is unlikely unless a larger debt reduction is envisaged. Walter Butler joining forces with OnePoint, Atos’ largest shareholder has increased the chances of shareholder involvement, but we reiterate this would have to be subject to even larger debt write-downs.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk