TheChek News Flow

Hedge funds bet against call centre stocks as AI threat grows

Outsourcing companies hit as investors see ‘clean’ disruption risk

Hedge funds are betting against the shares and debt of outsourcing companies providing call centres, telemarketing and other services, in the belief they will be decimated by the rapid growth of AI.

Stocks including Paris-listed Teleperformance, the world’s largest customer service company, and Nasdaq-listed TTEC Holdings are among those targeted by short sellers, as investors look beyond big software names for firms whose products could be under threat.

Call centre and other so-called customer experience companies are “a very, very clean AI disruption case”, said Kasper Elmgreen, chief investment officer for fixed income and equities at Nordea Asset Management. “Essentially you have a service which is just selling human time to handle repetitive tasks.”

Teleperformance has become one of the most shorted stocks in Europe, with hedge funds including Marshall Wace, Point72, Citadel Advisors and Squarepoint running bets against its shares, according to data group Breakout Point.

Total short interest against the firm — which provides services such as call centres, telemarketing, debt collection and back-office support and whose clients include Meta and Airbnb — has jumped from around 4 per cent at the start of the year to 17.2 per cent this month, according to S&P Global Market Intelligence.

Negative bets have been driven by a belief that AI could render the company’s services obsolete, said two people familiar with short sellers’ thinking.

Teleperformance’s shares have fallen by around one-quarter over the past year, and in September the stock was ejected from France’s blue-chip Cac 40 index.

Funds are also betting against the company’s debt, with an estimated 11 per cent of its €500mn bond due in 2030 being shorted as of the end of May, while 7.8 per cent of the €750mn bond due in 2028 has been shorted, according to Bank of America.

“The rise of generative AI has triggered a sharp shift in sentiment towards call centre operators,” said Vincent Benguigui, a senior credit portfolio manager at Federated Hermes.

“Investors increasingly fear that automated voice systems and digital agents will reduce demand for outsourced customer service staff . . . This narrative has driven a severe equity re-rating and spilled over into credit markets,” he added.

Privately owned Foundever Group, one of the largest providers of customer service calls, sales and help desks and which has clients including John Lewis Partnership, has seen its debt slide deep into distressed territory. Its two bonds due in 2028, worth $1.1bn and €1bn, are trading at around 50 cents on the dollar, after dropping as low as 39 cents earlier this year. Both traded at near par in early 2024.

In mid-December, S&P Global downgraded Foundever’s credit rating to CCC from B minus due to “expected liquidity deterioration and strained lender relationships”.

The €322mn of senior secured floating-rate notes issued by Swedish customer service and call centre provider Transcom — majority owned by private equity fund Altor — have slipped to 88 cents on the euro, down from 94.2 cents at the start of January.

Meanwhile, the shares of Nasdaq-listed customer service, call centre, chatbot and online content moderation providers Concentrix and TTEC Holdings have both dropped by around one-third this year.

Hedge funds are shorting 15.5 per cent of Concentrix’s shares and 11.8 per cent of TTEC’s, according to S&P Global Market Intelligence, based on shares on loan, a proxy for short selling. Shorts against Concentrix rose as high as 29 per cent in late April.

Such companies have been “decimated” over the past year and a half due to their inclusion in “this AI loser category”, said Emmanuel Cau, head of European equity strategy at Barclays.

“It’s not hard to understand why some of these call centres or [customer services] will be disrupted because, of course, you can imagine AI being able to do what they’re doing for much cheaper,” he added.

India, a country renowned for its customer service sector, has also seen big names hit. Firstsource Solutions has had 20 per cent wiped off its market value this year, while Hinduja Global Solutions’ stock has fallen 11 per cent.

However, Cau said the sell-off had perhaps gone too far as these companies would not disappear overnight and some were undervalued. That had led to “bottom fishing” and a “little bit of a nascent recovery”.

He added: “The question is whether some of these companies can use AI as a way to revive or to regain client interest. Are they disrupted, are they going to disappear? Or can they somehow improve or strengthen their business model by integrating AI?”

Some firms are rapidly trying to integrate AI into their systems. Teleperformance has launched TP.ai FAB Connect, which it describes as “hybrid intelligence orchestrating people, AI and workflows”, and Concentrix has a proprietary tool called iX Hero which helps customer support staff. A Concentrix spokesperson said the market was “drawing the wrong conclusion” and that the company was “positioned to lead” in the growth of “integrated offerings” of AI and people.

Teleperformance did not respond to a request for comment.

TTEC said the company had invested heavily in its AI capabilities and viewed the technology “as an opportunity, not a threat”, allowing it to improve its offering to customers.

HGS and Firstsource Solutions both said they were deploying AI in their businesses to improve services for customers.

Elmgreen said that there was more “nuance” around the AI loser theme and software more broadly had become a “hunting ground” for undervalued stocks, although he added the “burden of proof” for a company to dispel AI disruption fears was high.

“If I tell you that the business you’re running may not be viable in three to five years or a significant portion of your business may not be viable in three to five years, it’s going to be very hard for you to disprove that in the next quarter,” he said.

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Rival offers highlight claims of unfair competition over buying into second teams

Once fierce rivals in the fight for F1 glory, former Red Bull boss Christian Horner and Mercedes chief Toto Wolff were recently locked in a new battle that has reignited an old political debate.

As Horner looks for a way back into F1 after his departure from Red Bull, he has bid for a 24 per cent stake in the Alpine team that US investment group Otro Capital is looking to offload. Otro bought its share from majority owner Renault for about $220mn at the end of 2023, valuing Alpine at around $900mn. With team valuations now estimated at $2.5-$3bn, it appears a suitable time to cash out.

But Horner was not the only party looking to buy into Alpine, with Wolff involved in an offer from his Mercedes operation to secure a stake. Mercedes has a new engine supply partnership with Alpine and a financial interest would bring security in the alliance and the potential for longer-term returns.

Horner’s offer is being evaluated by Renault, which is understood to have a veto until September on anyone taking over the Otro Capital shares. But Mercedes last week pulled out of talks, because of widely differing estimates of Alpine’s value.

Horner’s involvement roused interest as it would give him a route back to F1 after leaving Red Bull under a severance deal last September, following his dismissal as team principal in July. But it was the potential for Mercedes to take part-ownership that piqued greater attention among rivals — in particular McLaren chief executive Zak Brown, who has long opposed such alliances.

Brown has spoken out about what he sees as unfair benefits for collaborative teams, with his ire directed at Red Bull, which owns both the Red Bull Racing and Racing Bulls operations.

Red Bull’s dual team approach began in 2005 when the energy drinks group purchased struggling Minardi and rebranded it Toro Rosso, investing heavily to make the acquisition its junior team. While it underwent identity changes, as AlphaTauri and now Racing Bulls, the team has consistently served as a proving ground for many of Red Bull’s stars, including champions Sebastian Vettel and Max Verstappen.

The potential for the Mercedes move with Alpine reignited Brown’s concerns about erosion of F1’s integrity.

The McLaren boss has spoken out in press conferences and last month wrote a long letter urging action to Mohammed Ben Sulayem, president of the FIA, motorsport’s governing body. Brown argued that with F1 in a healthy financial position, ownership of multiple squads was no longer fit for purpose.

The letter said alliances were unfair on independent rivals because of sporting, political and strategic advantages. Brown noted that shared resources such as wind tunnels and software can provide benefits when used across teams.

There are also mismatches of opportunity relating to the movement of personnel, Brown claimed. He said McLaren had to wait nine months and pay compensation for chief designer Rob Marshall to move from Red Bull in 2024, while last year Laurent Mekies switched from being team boss at Racing Bulls to Red Bull in a matter of days.

Brown also noted examples where he believes sporting integrity was undermined by teams working in alliance. He cited Daniel Ricciardo taking the fastest lap for Racing Bulls at the 2024 Singapore Grand Prix. Ricciardo got no benefit from doing so (at the time, only drivers in the top 10 positions were eligible for a fastest lap point and he was running in 18th). But by taking the fastest lap, he denied title-chasing McLaren a point. Racing Bulls denied wrongdoing, saying that a late stop for fresh tyres which aided the lap was a reward for his final race — he was dropped that weekend.

The letter — seen by the FT — also cited Racing Bulls’ Liam Lawson being ordered to move aside for Red Bull’s Max Verstappen in Miami. Lawson was surprised but said on behalf of the team that it was a mistake, not collusion.

Brown wrote: “There is a real concern that the sport risks taking a step backwards in terms of integrity and fairness, at a time when the regulatory framework has been designed . . . to move in the opposite direction.”

At the Miami Grand Prix in May, Ben Sulayem told media: “I do believe that owning two [teams] is not the right way — this is my personal point of view — but we are looking into that because it’s a complicated area.”

Mercedes had been adamant that Brown’s arguments did not apply to the type of involvement it wanted in Alpine, as this was purely financial.

Current regulations mean engine supply deals are not lucrative, with the $25mn price cap for customers in contrast to a power unit budget for manufacturers capped at $190mn. A stake in a customer team will allow a return on investment that is not possible through a normal customer transaction.

Multi-team ownership is not unique to F1. Other sporting competitions — such as football’s Uefa Champions League — have rules that allow shared financial backers but demand strict operational, financial and sporting independence. Mercedes had argued that its interest in Alpine was already along such lines and denied any suggestion it wanted to create a junior squad that could harm rival independents.

Whatever happens with Alpine, it is unlikely that we have heard the last of Brown’s crusade to change F1’s rules.

German lawmakers Andreas Mattfeldt and Andreas Schwarz can block arms procurement contracts worth €25mn or more

Some of the most powerful, yet least visible, people in Europe’s rearmament drive are two German lawmakers who share the same first name: Andreas.

As members of the Bundestag budget committee for the parties in Germany’s ruling coalition, Andreas Mattfeldt and Andreas Schwarz can approve or block any military procurement contract worth more than €25mn.

In recent months, they have become more assertive, vetoing contracts or demanding cuts to their value. Their interventions have frustrated officials pushing to modernise the Bundeswehr after decades of under-investment, and also some of their fellow MPs.

Mattfeldt, a member of Chancellor Friedrich Merz’s centre-right Christian Democrats, says the committee’s role is to provide proper checks and balances as Berlin prepares to spend €780bn on defence by 2030.

“We have made a paradigm shift, because we are responsible for huge sums of money the taxpayer has entrusted to us,” Mattfeldt said in an interview from his Bundestag office, whose walls are adorned with large prints of warships and fighter jets.

“I want us to be able to say that we have contributed to the Bundeswehr getting the best equipment — at the best price.”

The Bundestag budget committee’s unusual authority over defence contracts dates back to 1981. The German parliament, angered by cost overruns on projects including the Tornado fighter jet programme, stipulated that all projects worth 50 million Deutschmarks or more must be approved by MPs.

It also reflects the military’s place in postwar Germany. The Bundeswehr, created in 1955 to replace Adolf Hitler’s disbanded Wehrmacht, was conceived as a “parliamentary army” under tight Bundestag oversight. To this day, the government cannot deploy troops outside Nato territory without parliamentary approval.

In total, there are five lawmakers on the budget committee who are responsible for defence spending: one from each of the main parties in the Bundestag, including the far-right AfD. But since Mattfeldt and Schwarz represent the government’s parliamentary majority, it is up to them to thrash out key decisions.

They say they have few disagreements. “Not only do we have the same first name, we also have a similar CV,” said Schwarz. As former mayors, they are both used to pragmatism and compromise. “We don’t meddle in ideology, we use normal common sense,” he said.

Some other MPs and their staffers jokingly refer to the pair as “the two Andys”. They themselves have come up with their own nickname: the A-Team. “That’s because Andreas and I really work well together,” said Mattfeldt.

Their workload has increased dramatically since 2022, when Vladimir Putin’s full-scale invasion of Ukraine triggered Germany’s rearmament drive. In December, they approved more than €50bn worth of purchases in a single sitting.

But they have also been willing to put the brakes on defence minister Boris Pistorius’s plans. In January, they vetoed a proposal to award a €600mn contract for a mobile reconnaissance system to Munich-based Rohde & Schwarz without a competitive tender. A month later, they blocked another planned direct award: a €462mn deal for Rheinmetall and European missile maker MBDA to build a laser system designed to protect ships from drones.

In February, they also slashed the maximum value of three contracts to buy kamikaze drones, forcing the government to come back to the committee if they wanted to exceed €1bn per supplier. And, in April, they blocked the purchase of 900 mobile diesel containers for the Bundeswehr after spotting that the price had doubled compared with a previous purchase from the same supplier five years ago.

Christopher Wolters, a defence procurement specialist at Berlin law firm Blomstein, said the committee had become more important as government efforts to speed up military procurement curtailed companies’ ability to challenge decisions through judicial review.

“The committee has become an increasingly important avenue for industry to challenge the award of contracts — and a counterweight to the ministry of defence,” he said.

One government official said the €25mn threshold — which was originally set at 50mn Deutschmarks and has never been adjusted for inflation — was “completely out of step with the times.” He added that blocking procurement awards was detrimental to soldiers because they “lose valuable time”.

A German defence insider put it even more strongly. Mattfeldt and Schwarz, he said, were “pissing everyone off: the ministry, the procurement agency, the Bundeswehr, industry”. He added: “You can make some enemies in politics but you can’t piss off everyone — it won’t last.”

While Mattfeldt said he could imagine lifting the €25mn threshold to €50mn, he said it would only happen “if we parliamentarians decide it ourselves”.

A spokesperson for the German defence ministry said: “Parliamentary involvement in large-scale procurement projects is an important instrument of oversight in our democracy.”

Others worry that, rather than antagonising industry, the committee’s power leaves it vulnerable to lobbying and conflicts of interest at a time when the defence sector is awash with money.

German weekly Die Zeit last year reported that Blackned, which later became a subsidiary of the arms giant Rheinmetall, offered donations of up to €2,000 to eight MPs in the lead-up to elections. It was not clear how many accepted, or if any of them were on the budget committee.

Rheinmetall said the company’s compliance policy did not apply to Blackned “at the time in question”, when it only owned a minority stake. “Nevertheless, Blackned wholeheartedly supports centrist democratic parties,” it said, adding that donations were always made to parties, not individuals, and that the sums were “within very manageable limits”. “No specific expectations regarding any political decisions are attached to these donations,” they said.

Sebastian Schäfer, the Greens’ representative on the committee, said he was “shocked” to find out about the donations and that “it didn’t seem to be a big deal for some of my colleagues”.

The drone start-up Helsing also made campaign donations of €30,000 to four parties, including the CDU. It said the move was intended to bolster democratic parties at a time of growing support for the far right. The Greens turned down the offer.

Schwarz, who has been a budget committee member since 2017, said he had “never, ever witnessed a situation where the issue of being corrupted was ever a factor”. He added: “I simply haven’t seen it happen — nor has anyone, to my knowledge, even dared to suggest it. I also firmly believe that we have the mechanisms in place to prevent anything of that nature.”

The budget committee MPs irritate some fellow lawmakers, who accuse them of straying beyond their expertise by second-guessing the defence ministry and procurement office — weighing not just the cost of weapons, but whether they should be bought at all.

Some members of the Bundestag’s defence committee are upset by what they say is a perceived expectation to rubber-stamp whatever their colleagues on the budget committee decide. Those MPs are pushing for the whole process to be overhauled.

Both Andys shrug off the barbs that fly their way. “No one takes it personally,” said Schwarz, with a smile. “Everyone has their role.”