Atalian : Servest acquisition and new bond offering

The announcement of the takeover of Servest, which will rack up the group's debt significantly, surprised us by both its size (€ 0.6bn) and its price tag (pre- and post-synergy multiple of 13x and around 9x), far from the strategy pursued by Atalian in recent years. Still, we understand management's case for this company-transforming deal that lays the foundations for a global player capable of establishing a foothold in Europe, the US and Asia. It is now up to the group to successfully integrate Servest and to launch the deleveraging process. Given its track record in this arena, its fairly resilient businesses and its FCF generation capacity (excluding M&A deals which remain discretionary), we see gradual debt reduction this year, in line with Moody's and S&P's expectations for the group going forward. Our credit opinion is Stable. - Understandably, the 4.0% 2024 ATALIA bonds have been repriced in recent weeks (-4/5 pts) to reflect Atalian's weakening credit profile, as well as the imminent issuance of this new bond for which it needs to offer a more generous premium than in the past. The price talk was announced at around 5.25% for the euro notes and around 6.5% for the sterling notes. - >Support factors - - Atalian is a leading player in France in facility management and cleaning services. Thanks to its acquisitions strategy, the group is rapidly diversifying internationally, becoming a global player capable of gaining a foothold in larger markets (e.g. pan-European tenders).- Good visibility on business, correlated with economic conditions, with a favourable underlying trend, driven by growing outsourcing of such services by companies. Additionally, the group boasts a contract-renewal rate of over 90%.- Fairly flexible cost structure. The payroll represents about two-thirds of operating expenses and is fairly adjustable to business trends. Turning to spending, capex maintenance requirements are somewhat low (1.6% of sales p.a.).- Ability to digest acquired companies and generate a rapid return on investment. To expand, Atalian's plan is to snap up unprofitable companies, valued on post-synergy multiples of 4 to 5x EBITDA, and then raise their profitability towards the group's standards through its management methods.Points to watch - - Sharp rise in debt level following the Servest deal (net debt-to-EBITDA ratio of 6x vs. 3.7x at end-2017). The group has pledged to bring down this ratio beneath 4.5x, which nevertheless remains above the group's stated leverage ratio target last year (3 to 3.5x in the medium term) and the end-2017 level (3.7x pro forma). Its deleveraging capacity will depend on its acquisitions strategy, keeping in mind that management will continue to look at bolt-on acquisitions. However, these are discretionary investments that could be adjusted quickly in the event of a sharp deterioration in the environment.- Highly competitive sector with low barriers to entry. The group generates fairly low margins, particularly in international markets, the group's priority area for development.