Global IT Service Provider Capgemini Downgraded To 'BBB' On Acquisition Of Altran; Outlook Stable

  • Capgemini obtained clearance from the Paris Court of Appeals to proceed with its acquisition of France-based engineering and research and development provider Altran Technologies SE for a total cash consideration of €3.7 billion and €1.7 billion of gross financial debt.
  • We expect the combined group's pro-forma adjusted debt to EBITDA will weaken to about 3.6x in 2020 before falling to 3.0x or below in the following years, assuming Capgemini eventually purchases 100%. If ownership remains at the current 55% level, average leverage is over half a turn lower.
  • We are therefore lowering our ratings on Capgemini to 'BBB' from 'BBB+', and removing them from CreditWatch with negative implications.
  • The stable outlook reflects our view that Capgemini's solid balance sheet and liquidity and cash flow generation will allow it to manage the Altran acquisition and deleverage, despite ongoing market and economic turbulence.
PARIS (S&P Global Ratings) March 24, 2020--S&P Global Ratings today took the rating actions listed above. We expect Capgemini's debt to EBITDA will weaken to about 3.6x in 2020 if it acquires 100% of Altran Technologies S.A. (Altran; 2.8x for 55%), improving to 3.0x or below within the following two years (about 2.0x for 55%).
On March 13, 2020, the Paris Court of Appeals confirmed the validity of Capgemini's acquisition of Altran for a total cash consideration of €3.7 billion and €1.7 billion of gross financial debt (€1.5 billion net). This means Capgemini now holds 55.13% of Altran's share capital and 55.00% of voting rights. Capgemini's offer of €14.50 per Altran share (revised from €14) remains available until March 27, 2020. We believe it is very likely that Capgemini's stake will increase further, especially given the ongoing reopening offer and the recent announcement by Elliot of its intention to tender its shares to the offer. Capgemini intends to fund the acquisition by drawing under its committed €4.4 billion bridge facility and using about €1.0 billion of its own cash.
We have revised our base case downward through 2021 in response to the COVID-19 outbreak, but expect Capgemini will maintain adequate liquidity after the acquisition, and deleverage sufficiently to maintain metrics in line with the 'BBB' rating.
We assume Capgemini and Altran's revenue in 2020 will decline by 2% and fall to 2% respectively, compared with Capgemini's guidance of 4.0% (excluding Altran) and 5.5% growth, and that operating margins will be 1% lower. We continue to anticipate other operating income and expenses, including restructuring and integration costs, will amount to about €442 million annually (partially noncash) on average over 2020-2022. We assume significantly larger working capital outflow in 2020, while capital expenditure will reduce in line with revenue decline.
The combination strengthens our view of Capgemini's business profile, but its financial profile will depend on how synergies rebound.
The consolidation of Altran will create a world leader in information and operational technology able to provide an end-to-end offering from consulting and information technology (IT) services, to software, systems, and manufacturing engineering, as well as research and development (R&D) services to address a larger market demand. The combined group's revenue will increase by about 22%. Through enhanced scale and a broad services portfolio, the combined group will benefit from increased access to decision-makers from key accounts in dynamic industries (such as aerospace, automotive, life sciences, and telecommunications) including R&D, manufacturing, and supply chain executives. The acquisition will also allow Capgemini to accelerate its development with major internet and technology companies, by giving the new entity a critical mass in software engineering through centers of expertise, particularly in India and Eastern Europe. We expect successful integration of Altran will provide annual pretax cost savings and operating synergies of about €50 million in 2021 and about €100 million in 2022. Within three years of the acquisition, we anticipate commercial synergies will generate about €275 million (€200 million-€350 million under Capgemini's guidance provided in June 2019) in additional annual revenue from cross-selling and the development of innovative sectorial offers.
The stable outlook reflects our view of Capgemini's solid balance sheet and liquidity, and our expectation of sustained revenue recovery (low to mid-single digit) after our estimate of a slight drop in 2020 due to the outbreak of COVID-19. We expect the company's adjusted EBITDA margin will remain above 13%, adjusted leverage will remain above 2.0x, and funds from operations (FFO) to debt below 45%.
We would consider lowering our rating if Capgemini's adjusted leverage increases well above 3.0x for a prolonged period, with FFO to debt remaining at 20% or below. This could occur through unexpected deterioration in operating performance and/or lower expected synergies and higher required costs for Altran's integration.
We could take a positive rating action if we consider the group able to significantly improve its margin and cost structure. We could raise our rating if Capgemini sustainably improves its S&P Global Ratings-adjusted EBITDA margin toward 15% and FFO to debt above 45%, while maintaining mid-single-digit currency growth and adjusted debt to EBITDA below 2.0x.
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