Atos, a French IT services company, announced on Monday that it intends to sell its Tech Foundations business unit to EPEI, a private equity firm, for a net cash positive impact of €0.1 billion and the transfer of €1.9 billion of on-balance sheet liabilities. The deal, which is expected to be completed by the end of 2023 or early 2024, would allow Atos to complete its strategic transformation and focus on its core activities in digital, cloud, cybersecurity and advanced computing.
Tech Foundations: a legacy business with low growth and profitability
Tech Foundations is the Atos business unit that provides managed services, such as hybrid cloud infrastructure, employee experience and technology services, to its customers. It was created in June 2022, when Atos announced its plan to separate its two main businesses: Eviden, which covers the high-growth segments of digital, cloud, cybersecurity and advanced computing, and Tech Foundations, which covers the low-growth segments of managed services and legacy IT.
Tech Foundations has been struggling with declining revenues, margins and cash flows, due to the competitive pressure, the shift to cloud and the impact of the Covid-19 pandemic. In 2022, Tech Foundations reported a revenue of €5.6 billion, down 6.8% year-on-year, an operating margin of 3.9%, down 1.1 percentage point year-on-year, and a negative free cash flow of €-0.3 billion.
EPEI: a private equity firm with expertise in IT services
EPEI is a private equity firm that specializes in investing in IT services companies, with a focus on value creation, operational improvement and digital transformation. EPEI has a track record of acquiring and turning around underperforming IT services businesses, such as DXC Technology, Capgemini and CGI.
EPEI has expressed its interest in acquiring Tech Foundations, as it sees potential for growth and profitability improvement in the managed services market, especially in the areas of hybrid and multi-cloud infrastructure, digital business platforms and technology advisory and customized services. EPEI believes that Tech Foundations has a strong customer base, a talented workforce and a solid technological expertise that can be leveraged to create value.
The deal: a win-win situation for Atos and EPEI
The deal, which is subject to final agreements and certain financial and other customary conditions, including relevant shareholders’ approvals, regulatory clearances, consent from its concerned creditor banks and other third-party consents, would entail the following:
- Atos would sell 100% of Tech Foundations to EPEI for a net cash positive impact of €0.1 billion and the transfer of €1.9 billion of on-balance sheet liabilities, leading to an enterprise value of €2.0 billion.
- Atos would be renamed Eviden, a high-growth leader in the digital, cloud, cybersecurity and advanced computing markets, with cutting-edge innovation and technologies. Eviden would hold an Investor Day prior to its Extraordinary General Meeting to present its strategy and outlook.
- Eviden would sustainably strengthen its balance sheet with planned capital increases for a total of €900 million (consisting of a reserved capital increase at an agreed price of €20 per share pursuant to which EPEI will hold 7.5% of the share capital and a €720 million rights issue for all shareholders) with the €400 million new divestment plan announced last week. BNP Paribas and J.P. Morgan have provided a standby underwriting for the rights issue amount (less the amount of EPEI’s subscription commitment), subject to usual conditions. Eviden would also seek to extend maturities and reduce its debt.
- Eviden would target a net leverage of c. 3x by 2024 year-end and at c.2x by 2025 year-end, benefitting from an improved liquidity situation. Eviden would also upgrade its mid-term ambitions to reflect its strong delivery and faster transformation: revenue back to growth in 2026, 6 – 8% operating margin in 2026 and cash flow turning positive in 2025 and reaching over €250 million in 2026.
- EPEI would invest €217.5 million in Eviden, consisting of €180 million in the reserved capital increase and €37.5 million in the subsequent rights issue. EPEI would also support the transformation of Tech Foundations and provide strategic and operational guidance to its management team.
The deal has received unanimous support from Atos’ Board of Directors and would be submitted to shareholders’ approval in an ad-hoc EGM to be announced in Q4 2023.
The reaction: a positive response from the market and the analysts
The announcement of the deal was welcomed by the market and the analysts, as it would allow Atos to complete its transformation and focus on its core activities, while reducing its debt and improving its capital structure. The deal would also create value for both Atos and EPEI, as they would benefit from the synergies and the opportunities in their respective markets.
The share price of Atos rose by 7.3% on Monday, reaching €21.5, the highest level since June 2022. The analysts praised the deal, as they considered it a positive step for Atos to exit the low-growth and low-margin managed services business and to concentrate on the high-growth and high-margin digital, cloud, cybersecurity and advanced computing segments. The analysts also appreciated the capital increases, as they would strengthen Atos’ balance sheet and reduce its financial risk.
