IT services company Atos runs into headwinds with plan for IBM-style split

IT services company Atos has lost its chairman over a dispute about plans to sell its legacy managed infrastructure services business as it prepares for an IBM-style split between faster- and slower-growing activities.

Atos says the deal is still on — but after its chairman Bertrand Meunier resigned last week following a legal challenge from an activist investor, the company pushed back the timetable for closing the deal by three months.

[ Update: Atos warns deal to sell legacy managed infrastructure services business may fall through. See “Atos contemplates fire sale as break-up plan falters” ]

The deal will spell an end to the current one-stop shop for IT services that it offers its enterprise customers, but will free up capital and cash-flow for it to invest in more modern activities: digital transformation, smart digital platforms, cloud technology, cybersecurity, high-performance computing and AI.

IBM spun out its legacy managed infrastructure services business as a new company, Kyndryl, in November 2021, seeking to become a faster-moving and more profitable company focused on modern technologies.

That strategy appealed to the management of Atos, a major European player in the IT services market with a history almost as long as IBM’s, and in July 2022 Atos announced its own plan to split, spinning off its less profitable activities including data centers and hosting; the digital workplace; unified communication and collaboration; and business process outsourcing.

Atos had planned to divide into two publicly listed companies, but on August 1 announced it would take taking a different route, saying it was close to selling its legacy business, known internally as Tech Foundations, to EP Equity Investment, a Luxembourg-based firm controlled by Czech billionaire Daniel Kretinsky. EPEI is expected to pay €100 million (about $110 million) for business, provisionally named TFCo during the transition, and to take on €1.9 billion of Atos’ corporate debt, thus valuing the deal at around €2 billion.

That change of plan did not please some of its minority investors. One of them, CIAM, had publicly Atos executives of providing insufficient information to shareholders, settling for too low a price, and having a conflict of intersts. It filed suit against Meunier in mid-October, prompting his resignation.

On October 16, 2023, Atos named one of its independent directors, Jean-Pierre Mustier, as its new chairman, and said the sale of TFCo to EPEI was still the most realistic way to separate the two halves of the business and improve its risk profile.

However, it said, it may need to renegotiate some financial aspects of the deal, which it now expects to close in the second quarter of 2024, not the first. If the deal with EPEI falls through, it will have to consider the sale of other assets or seek other sources of finance to meet debts falling due in 2025.

New name

Under the pan introduced in August, Kretinsky will take over TFCo and also the Atos brand, which the legacy business unit will have exclusive rights to. The parent company, meanwhile, will adopt the name Eviden, a variant of the Evidian brand previously used for its security products.

EPEI has little experience managing technology companies. The closest thing in its portfolio is a stake in Aareal Group, a bank that has an ERP software subsidiary, Aareaon, which provides digital solutions for the European property industry. Its other investments include minority stakes in national postal services, supermarket chains, consumer electronics stores and a French TV network.

Atos is looking for a clean break between the two halves of its business, and has spent the last year allocating staff to one part or the other.

“There are no synergies today between both divisions,” Nourdine Bihmane, Atos co-CEO in charge of Tech Foundations, said in a conference call to discuss the EPEI deal. “We can create a lot of value through our focus on the most attractive markets.”

Bihmane also announced the appointment of a new group CFO, Paul Saleh, a veteran of Sprint Nextel, CSC and DXC Technology.

Saleh explained how Eviden plans to raise capital to develop its business after the Tech Foundations sale. The company is planning a new share issue to raise €900 million in fresh capital, €218 million of which will come from EPEI, and also hopes to raise another €400 million from the sale of non-core assets. It has already raised €700 million this way over the last year.

Declining market share

Philippe Oliva, Atos co-CEO in charge of Eviden, outlined how the company plans use that capital, growing revenue by 7% annually through 2026. That’s ambitious given Eviden’s recent performance, but somewhat underwhelming given the much higher growth rate of 11.7% that the company forecasts for the total addressable market it in which it operates.

In effect, Oliva is planning on losing market share.

As for that recent performance, Atos reported financial results for the first half of 2023 last month.

Revenue from Tech Foundations totaled €2.92 billion for the half-year, down 3.3% from €3.02 billion a year earlier. Eviden’s revenue for the half year was €2.63 billion, up 3.5% from €2.54 billion. It also had the healthier operating margin, 5.3% compared to Tech Foundations’ 2.5%.

Overall, the company’s revenue for the half year remained almost flat at €5.55 billion; its net loss increased slightly to €600 million, from €503 million a year earlier.

Next steps

Atos still needs shareholder approval for the sale of TFCo to EPEI, for which it will call an extraordinary general meeting in the fourth quarter, and clearance from its banks and regulators, which it expects to receive in early 2024.

Only then will Eviden be able to go ahead with its new share issue to raise capital to develop its business, executives said.

Saleh, drawing on his prior experience as CFO at CSC and DXC, explained that the Eviden’s digital and cybersecurity activities would offer a relatively quick return on that working capital, while expanding the high-performance computing business will involve tying up infrastructure investments over longer periods.