Bondholders Fear Priming in Atos’ Business Split, Planned Equity Raise Among Bank Debt Extensions Talks, Liquidity Questions, Governance Concern

Relevant Documents:
Atos Strategic Plan
Investor Presentation Oct. 16
Oct. 16 Press Release
Webcast Replay

Bond investors to IT group Atos are concerned about being primed as the company announced some progress in debt talks with its bank lenders. Atos is racing against the clock as the French group faces bank debt maturities in January and seeks to implement a business split featuring an equity raise against a backdrop of governance struggles and business underperformance, sources told Reorg.

The listed group said earlier this week that it had received positive feedback from its lenders regarding the waivers required for a contemplated sale of a part of its business and plans to secure new financing for the remaining business entity. This has offered minimal reassurance to bondholders concerned about priming.

Atos is selling Tech Foundations, or TFCo, and is in exclusive talks with EP Equity Investment, or EPEI, in a deal valued at €2 billion. EPEI is owned by Czech billionaire Daniel Kretinsky, who has recently been in the news as the buyer of French supermarket chain Casino. Upon completion of the deal, Atos will be renamed Eviden and TFCo will continue using the Atos brand.

Atos reported €5.04 billion of senior unsecured debt as of June 30. Its bonds and loans currently rank pari passu. Some creditors are concerned Atos may offer its bank lenders preferential treatment, possibly offering them security, in return for agreeing to certain terms, sources said.

This would be similar to Orpea’s refinancing during the first conciliation proceeding where Orpea’s core banking group provided a syndicated loan secured by first ranking pledges and priority over the allocation of asset sale proceeds. Priming some lenders could offer Atos a way to pursue a non-consensual restructuring using an accelerated safeguard further down the line.

As part of the proposed split of its business and sale of TFCo, Atos said its plans to raise €900 million to increase its capital base, with €217.5 million coming from EPEI, giving it a 7.5% stake in Eviden. Additionally, Eviden’s capital structure will be strengthened by additional proceeds from the disposal of €400 million new identified non-strategic assets, expected to be received after December 2023, Atos said.

In an investor presentation earlier this week, Atos’ new CEO, Yves Bernaert, said that should the transaction with EPEI not go forward, the company expects to meet its liquidity requirements for 2024 supported by forecast business performance, continued access to the factoring program and completion of a €400 million asset divestment plan. The group would have to access the debt and equity capital markets and/or consider the sale of additional assets to refinance its €1.5 billion term loan A maturing in January 2024 (subject to two six-month extension options) and €750 million bonds maturing in May 2025. Management reiterated that if the transaction was not approved, they would still go ahead with the separation of the two businesses.

The shareholder meeting to approve the sale of TFCo and the capital increases is anticipated in the second quarter of 2024.

Atos' capital structure as of June 30, 2023 is below:

In addition to talks with its banks, Atos has to convince shareholders of the merit of its business split. The group’s shareholders are mostly retail holders and there is no reference shareholder. This complicates getting traction from existing equity investors to commit to providing the remaining capital required in the business split, sources said. Some existing shareholders are questioning the rationale of taking part in a rights issue with the money provided going behind a lot of existing debt.

Some shareholders highlight that the plan to sell TFCo involves Atos providing about €1 billion to clear TFCo’s working capital requirements. They consider that if they were to participate in Atos’ proposed capital increase, their contribution would effectively result in a net loss for Atos and deprive it of the financial resources necessary for its future, sources told Reorg.

The pushback from shareholders on Atos’ current plan comes on the back of previous challenges to management. In June, minority shareholder Sycomore Asset Management called for Atos' chairman, Bertrand Meunier, to step down. Shareholders rejected the resolution to remove Meunier with around 67% of votes going against the proposal. Meunier eventually resigned from the board earlier this week.

In addition, investment management firm Ciam denounced the conditions envisaged for the sale to EPEI and called for the transaction to be abandoned, while criticizing irregularities in Atos’ communications strategy and governance, as reported.

Specifically, Ciam pointed to the “misleading” conditions announced for the transaction, indicating that Atos failed to “specify the existence of a negative transfer price.” The fund added that it believes Atos’ redefined transformation plan outlined on Aug. 1 contradicts earlier statements made by the board.

Ciam called for the Atos board to specify the measures it will establish to deal with a “serious conflict of interest” it has identified.

On Sept 22, Alix AM, another small Atos shareholder, filed an initial complaint with the French National Anti-Fraud Office, or PNF, alleging active and passive corruption by the company, PNF confirmed to Reorg.

Other minority shareholders opposed to the sale, grouped together in the Union des actionnaires d'Atos constructifs, or Udaac, which claims to represent 2% and 2.5% of the capital, are preparing an “alternative strategic plan” without the sale.

Atos said its board of directors met and reviewed the letters received from certain shareholders as of Sept. 18.

The group said these shareholders ignore market recommendations regarding shareholder-company dialogue, as they publicized the letters in the media instead of meeting with the company to express their views and obtain answers. It added, the board firmly rejected their allegations and emphasized that “it had always acted solely in the interests of Atos.” It added the recent personal accusations made against executives and directors are “unfair and unjustified.”

It also claimed that the contemplated sale of TFCo announced would enable the planned separation of Eviden and TFCo, in the best possible conditions given the current circumstances.

Overview of Strategic Plan

According to Atos’ investor presentation, on Monday, Oct. 16, the contemplated sale of TFCo at an implied enterprise value of €2 billion (or 3.9x 2022 reported operating profit before depreciation and amortization, or OMDA) would allow Atos to transfer €1.9 billion of its on-balance sheet liabilities (including provisions for risks and restructuring charges, IFRS 16 leases, pensions and contingencies) and €7.6 billion of off-balance sheet liabilities (including performance, leasing, financing guarantees and other parent company guarantees) to EPEI.

Atos said this would unwind about €800 million of intra-year working capital needs as of Aug. 1, which will be transferred to EPEI at closing (i.e. €1 billion of current operating assets and liabilities attributable to TFCo and negative €200 million forecast working capital as Dec. 31, 2023, as a consequence of non-recourse factoring, reduction of average days of receivables and extended supplier payment terms). Eviden will have the opportunity to monetize €442 million from the sale of receivables through factoring, which would have a positive €104 million net cash impact for Eviden.

At the presentation, Atos’ CFO said that the €1 billion working capital unwind is not cash paid by Eviden to TFCo. In the Q&A, management responded to investors' questions on working capital. Management said that Eviden’s minimum cash to operate will be €200 million and €300 million of receivables factoring will remain with Eviden post-transaction. Management said it is taking actions to improve working capital and reliance on factoring would not be necessary in the future.

A overview of the proposed deal is below:


Management explained the ‘upside-sharing mechanism’ for Eviden under which Eviden is entitled to receive up to 10% of TFCo’s share capital in 2027 upon achieving certain operational targets. In case of total or partial monetization of TFCo by EPEI, Eviden would receive 40% of net proceeds of such transaction before Dec. 31, 2026, and 20% of net proceeds from Jan. 1, 2027. The purpose of this mechanism was to protect Eviden in the event more value was extracted from the business, management said.

Eviden’s target pro forma net leverage will be about 4x, as illustrated below, and Atos said it is expected to improve to 3x by year-end 2024 and 2x by year-end 2025 targeting investment grade rating in the medium term. Management said during the call to have met with the rating agency S&P and has received an indicative rating for Eviden of BB- at closing.

Atos said it is negotiating loan waivers with its banks and refinancing. The target pro forma maturity profile after the transaction would be as follows, with a new term loan A, with lower principal, maturing in December 2026, which is under negotiation with banks currently, and a new forward RCF starting in November 2025 and maturing at the end of 2026. Atos will also maintain the current revolver maturing in 2025.

Business & Financial Overview

In full-year 2022, Atos generated revenue via two segments, the Tech Foundations and the Eviden perimeter. In total they generated about €11.341 billion of revenue, of which 47%, or €5.315 billion related to Eviden. About 72% of Eviden revenue was generated through Digital activities and the remainder through Big Data and Cybersecurity, or BDS.

In 2022 operating profit for the Tech Foundations was about €79 million, whereas for Eviden it was €276 million, or 78% of the group’s total €356 million figure. Eviden generated an operating margin of 5.2% and Tech Foundations 1.3%.

When first-half results were released in July, Atos said Tech Foundations and Eviden are now fully operational as separate entities within the Atos Group. Each entity has a distinct operating model, go-to-market strategy and a focused portfolio.The full year 2022 and first half of 2023 financials of the two separate businesses are being drawn up, management said, and will be shared with the market.

Atos operational performance for the first half of 2023 is below:

In the second quarter, Eviden’s book-to-bill was 119% compared with 102% for the Tech Foundations segment.

In the first half of 2023, the group EBITDA (reported OMDA) was €487 million up from €369 million a year earlier. This was in part inflated by a large amount of exceptional items, with €430 million related to staff reorganization costs.These costs reflected restructuring costs as well as one-off separation costs related with the internal carve-out.

Reorg’s calculated cash EBITDA came at about negative €67 million. Some of the cash items that precipitated the reported cash burn of €969 million related to working capital outflows of €512 million. Cash taxes and net cash interest paid were each €40 million, payments of leases was €181 million and capital expenditure was €110 million. Atos said that free cash flow for the full year 2023 is expected to remain broadly similar to that of the first half 2023.

In the Oct. 16 investor presentation, the CFO said that the sale of TFCo will enable the group to deconsolidate significant negative free cash flow of TFCo in 2023 and 2024.

As of June 2023 Reorg-calculated net debt including lease liabilities totaled €3.324 billion, above the 2022 year-end figure of €2.685 billion. Net leverage reached 2.9x compared with 2.6x, respectively. Over the period the gross debt rose by €69 million mainly due to new borrowings of €1.7 billion but the increase was offset by debt repayments of €1.44 billion and a decrease in lease liabilities of about €100 million. New borrowings corresponded to the additional drawdown made on the term loans and the RCF in the period.

Atos’ consolidated historical financials is below:

Spin-off Project

On June 14, 2022, Atos announced a plan to separate the company into two publicly listed companies, the SpinCo (Eviden) and TFCo. From the start, investors worried about the group’s ability to deliver on what they considered a complicated restructuring plan and how it will affect the debt. Indeed the group had planned to shift the bonds to its proposed SpinCo housing its performing lucrative assets, and expected to deleverage rapidly. The remaining loss-making IT infrastructure management services business will be turned into TFCo (Atos).

Under the spin-off plan, SpinCo would be focused on two segments, Digital and BDS. Digital generated €3.5 billion in revenue in 2021 and high single-digit operating margin and as of June 2022 employed about 50,000 experts. BDS generated €1.4 billion in revenue and a mid single-digit operating margin in 2021 and employed about 9,000 experts as of June 2022.

SpinCo was expected to deliver about 7% organic revenue growth on average over 2022-2026 and to gradually improve its operating margin to 12% in 2026 and generate €700 million in free cash flow before interest and tax, corresponding to a 75% to 80% OMDA conversion. Both the organic growth and operating margin targets have not changed with the new proposed transformation plan.

TFCo on the other hand would consist of Atos’ Tech Foundations business line, focused on designing, building and managing complex and vital information systems worldwide. With about 48,000 employees across the world and serving more than 1,200 customers across geographies and industries, Tech Foundations generated in 2021 (excluding Unified Communication & Collaboration activities, or UCC), €5.4 billion in revenue, a negative 1.1% operating margin and a negative €507 million free cash flow before interest and tax. By 2026 TFCo was expected to generate free cash flow before interest and tax of about €150 million.

On Oct. 16 Atos’ CEO reaffirmed the strategic rationale of the separation of the two businesses highlighting that the two segments operate in two distinct markets with different dynamics and should have different capital structures. He added that since the separation announcement in June 2022, Atos was approached by several players interested in the acquisition of the Tech Foundations business but economic and capital market conditions made it increasingly challenging to monetize Eviden on acceptable terms and access the financing market for TFCo. The contemplated transaction with EPEI is the best possible outcome for the separation of the two businesses and would ‘unlock the inherent intrinsic value’ of the Eviden segment, which also attracts high valuation multiples, the group said.

Atos said it did not wish to comment.