Atos: from roll-up to blow-up as IT group gropes for reboot switch
Any investor joining this rescue mission may end up floundering
Atos enjoyed years of acquisition-fuelled growth. Flaws in the French IT group’s roll-up strategy began appearing after an ambitious bid failed in early 2021. Even so, investors are shocked by the news chief executive Rodolphe Belmer is leaving amid a restructuring. The shares, down by three-quarters since January 2021, fell another 23 per cent on Tuesday.
Belmer is apparently departing after falling out with other board members over a spin-off. The disagreement left the ex-Eutelsat boss, who started only in January, ill-placed to sell the merits of the turnround plan underpinned by the transaction.
There is a logic in demerging a profitable big data and cyber security division. That should stop it being dragged down by the legacy IT services business. This is suffering from problematic legacy contracts and IT budgets shifting to cloud investment.
Atos reckons IT services will cost €1.1bn to turn round. The unit is only expected to start making operating profits in 2025. Investors will attribute little value to it.
The big data and cyber security business operates in fast-growing markets and is worth more. Atos reckons free cash flow, before interest and tax, could grow nearly fivefold to €700mn by 2026.
Assume, generously, that the company meets its targets. Applying a 7 per cent free cash flow yield and deducting €400mn of planned investment, implies a value of as much as €3.5bn for Atos investors who would get 70 per cent of it. The remainder would be held by the rump company to fund the turnround.
Investors should be more sceptical. Atos needs €1.6bn in funding for 2021-22, after taking account of debt repayments and planned asset sales. This sum is now bigger than the market value. Given its weak cash flows, there is a risk net debts will rise sharply. That would breach a debt covenant, according to Citi.
Atos insists there is no risk of this, so no need to raise more capital. But the management team is untested. Any investor joining this rescue mission may themselves end up floundering.
Gapping down
News:
- OM -24.2% (announced shipment hold on distribution of Tablo Hemodialysis System for home use)
- RDBX -21.3% (post-effective amendment to Form S-1 was declared effective by the SEC)
- DAWN -12.6% (offering of $125.0 million of shares of its common stock)
- SBSW -7.4% (discloses details of "significant" flood event)
- APLD -4.6% (announced expiration of share lock-up agreement)
- VBNK -4.2% (acquires OCC-Chartered National US Bank)
- XPER -3.4% (Adeia business received unfavorable ruling in Videotron litigation)
- FOA -2.6% (CEO Patricia L. Cook to sep down on June 30)
- GRPN -2% (appoints Dusan Senkypl to the Board of Directors; Jan Barta appointed as Board observer and to join Board of Directors by November 30 2022)
- ENLC -2% (announces retirement of Chairman and CEO Barry Davis names Jesse Arenivas as new CEO)
Analyst comments:
- COIN -6% (downgraded to Neutral from Overweight at JP Morgan)
- HUN -3.8% (downgraded to Underperform from Buy at BofA Securities)
- AZN -3.6% (downgraded to Neutral from Buy at UBS)
- NFLX -2% (downgraded to Sell from Hold at The Benchmark Company)
- CC -1.8% (downgraded to Neutral from Buy at BofA Securities)
- BBY -1.7% (downgraded to Neutral from Buy at BofA Securities)
- NVST -1.7% (downgraded to Neutral from Outperform at Robert Baird)
- HPE -1.5% (downgraded to Hold from Buy at Deutsche Bank)
- HSIC -1.1% (downgraded to Neutral from Outperform at Robert Baird)
- OMC -1% (downgraded to Hold from Buy at Edward Jones)
Gapping up
In reaction to earnings/guidance:
- BRZE +12.2%, ORCL +11.7%, BFH +5% (guidance), CNM +2.9%, LICY +1.6%, ANF +1.5% (guidance), TWI +1.3% (guidance), COTY +1.1%
Other news:
- EYE +13.8% (appointed to join S&P SmallCap 600)
- WULF +7.5% (announced recent financing actions and near-term ramp of digital infrastructure)
- CLR +7.5% (announces receipt of "take private" proposal from Hamm Family of $70/share)
- OSG +6.8% (authorized repurchase of 5 mln shares)
- HYZN +6.1% (acquires Orten Betriebs GmbH and Orten Electric Trucks GmbH)
- MNTS +3.4% (provided Mission Update for Vigoride-3 spacecraft)
- GAN +3.3% (extends its previously authorized $5 mln share repurchase program to November 30 2022)
- MOR +1.7% (entered into collaboration with Pfizer [PFE] and Incyte [INCY] for Monjuvi and TTI-622)
- ICFI +1.2% (awarded a $30 mln contract by U.S. Department of Defense Defense Health Agency)
- ALNY +1.2% (receives FDA approval for AMVUTTRA)
- UNVR +1% (subsidiary announces new distribution agreement with BOAI NKY Pharmaceuticals)
- RMD +1% (acquires MEDIFOX DAN for $1 bln)
Analyst comments:
- SLCA +3.8% (upgraded to Outperform from In-line at Evercore ISI)
- PBF +3.5% (upgraded to Overweight from Equal Weight at Wells Fargo)
- NOK +3.1% (upgraded to Buy from Neutral at Citigroup)
- NTAP +2.4% (upgraded to Buy from Hold at Deutsche Bank)
- TSCO +1.3% (upgraded to Buy from Neutral at BofA Securities)
- BGS +1.2% (upgraded to Neutral from Underweight at Piper Sandler)
Research Calls I
- Upgrades:
- B&G Foods (BGS) upgraded to Neutral from Underweight at Piper Sandler; tgt lowered to $23
- NetApp (NTAP) upgraded to Buy from Hold at Deutsche Bank; tgt lowered to $84
- Nokia (NOK) upgraded to Buy from Neutral at Citigroup
- PBF Energy (PBF) upgraded to Overweight from Equal Weight at Wells Fargo; tgt $57
- Tractor Supply (TSCO) upgraded to Buy from Neutral at BofA Securities; tgt raised to $260
- U.S. Silica (SLCA) upgraded to Outperform from In-line at Evercore ISI; tgt $20
- Downgrades:
- AeroClean Technologies (AERC) downgraded to Hold from Buy at The Benchmark Company
- AstraZeneca (AZN) downgraded to Neutral from Buy at UBS
- Best Buy (BBY) downgraded to Neutral from Buy at BofA Securities
- Chemours (CC) downgraded to Neutral from Buy at BofA Securities; tgt lowered to $44
- Coinbase Global (COIN) downgraded to Neutral from Overweight at JP Morgan; tgt lowered to $68
- Envista (NVST) downgraded to Neutral from Outperform at Robert W. Baird; tgt lowered to $46
- Henry Schein (HSIC) downgraded to Neutral from Outperform at Robert W. Baird; tgt lowered to $88
- Hewlett Packard Enterprise (HPE) downgraded to Hold from Buy at Deutsche Bank; tgt lowered to $16
- Huntsman (HUN) downgraded to Underperform from Buy at BofA Securities; tgt lowered to $34
- Legacy Housing (LEGH) downgraded to Neutral from Buy at B. Riley Securities; tgt $16
- Netflix (NFLX) downgraded to Sell from Hold at The Benchmark Company; tgt $157
- Omnicom (OMC) downgraded to Hold from Buy at Edward Jones
- Others:
- Ashford (AINC) initiated with an Outperform at Oppenheimer; tgt $28
- Chesapeake Energy (CHK) initiated with an Outperform at Credit Suisse; tgt $115
- Coherus BioSciences (CHRS) initiated with a Neutral at UBS; tgt $7
- Horizon Pharma (HZNP) initiated with a Buy at UBS; tgt $139
- Intra-Cellular Therapies (ITCI) initiated with a Buy at UBS; tgt $75
- Jazz Pharma (JAZZ) initiated with a Buy at UBS; tgt $194
- Marathon Petroleum (MPC) initiated with an Outperform at BMO Capital Markets; tgt $135
- Phillips 66 (PSX) initiated with an Outperform at BMO Capital Markets; tgt $132
- Royalty Pharma (RPRX) resumed with a Buy at UBS; tgt $47
- Teva Pharma (TEVA) resumed with a Neutral at UBS; tgt $10
- Valero Energy (VLO) initiated with a Market Perform at BMO Capital Markets; tgt $155
- Viad Corp initiated with an Outperform at Oppenheimer; tgt $42
- Viatris (VTRS) initiated with a Sell at UBS; tgt $9
