Atos: from roll-up to blow-up as IT group gropes for reboot switch

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.