Altran: American Dream

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Source: Moneypit

Altran Technologies has decided to be bold, both in strategic and financial terms. The engineering services company has agreed to pay $2 bn for Aricent (a US-based rival owned by private equity firms KKRSequoia Capital and a former unit of Flextronics), valuing the company twice as much in terms on EV/Sales ratio based on LTM numbers.

For Altran, the purpose of this transaction is to accelerate its expansion in the US and become a world leader in the R&D and engineering services market. Its revenue will reach €3 bn sooner than anticipated in its Vision 2020 Strategic plan, compared with €2.1 bn in 2016.

But probably more importantly it is to replicate the model of global service delivery with both onshore/offshore resources already massively deployed by IT services companies in the world like Accenture, Capgemini, Atos and therefore not get distanced by larger potential rivals.

It’s also a way to become more visible in the US market where large R&D budget spenders need to face with services providers that have a critical size to address their problems and help solve them.

For Altran’s shareholders, this transaction comes with a price. Altran need to raise €750 million via a capital increase, the rest of the €1.7 bn price paid for Aricent will be financed with debt. This will boost the leverage ratio of Altran above 3x EBITDA.

We don’t know yet which discount Altran will apply to its new shares and how many DPS it will issue to make the deal acceptable to existing shareholders. We only know the deal is fully underwritten, under usual terms.

But there are other major risks. First of, the buyout of Aricent comes at a time when financial markets are very pricey and where people are talking more and more about a rise in market volatility next year.

Of course, a long term view of a business shouldn’t be based on financial market views. But the risks a market correction convey (poor access to liquidity, higher costs of financing, potential lower revenue and cash flow streams) can’t be ignored either and there is no assurance those risks have been properly assessed (of course, Altran’s management will always claim they did).

Second, there is no certainty that synergies promised by the management will be achieved and that the transaction will be EPS accretive year 1, as announced.

This mean that provided that the announced synergies are realized in a timely manner, for now Altran’s shareholders can only think that this transaction is a bold move made with their money. History will tell us if Dominique Cerutti’s American Dream was worth it.

 

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