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Atento: No Easy Way Out

Courtesy of Maran Capital Management, Atento is a value idea in Latin America, albeit with a neat focus on Brazil.

The company was founded in 1999 to consolidate the Telefónica Group’s CRM services — a sophisticated designation for what essentially consists of a call-center business — into a single entity, and later expanded to other sectors and geographies.

Telefónica announced its intention to list Atento in 2007, but the plans were sidelined by the financial crisis. A flotation made the headlines again several years later, in 2012, as the cash-strapped telecom group sought to deleverage in urgency.

In the end, Atento was sold to Bain Capital for $1.3bn — far less than expected by its former owner, which at some point had fancied a $1.8bn valuation on public markets. As a standalone operation, the company started to grow and made a successful foray into financial services (now 35% of revenue) and non telecom related industries (20%).

As of 2018, Latin America accounts for 87% of revenue – Brazil for 47% – and Spain for 13%. Atento employs 150,000 staff across 100 contact centers in 13 countries, which make the company the leading helpdesk provider in the continent and the fourth largest worldwide.

Money-wise, revenue remains stable but doesn’t grow anymore, while EBITDA amounts to an average of $200mil per year. In itself, the business is everything but exciting — no-growth, low margins, low returns — and would deserve little attention, save for its surprisingly low valuation at x3 EBITDA.

After-tax earnings are a whole different matter, for the company bore massive foreign exchange losses and a substantial interest charge. Besides, cash earnings (“free cash-flow”) are scant and can hardly cover both growth endeavors – albeit acquisitions are by nature limited in size – and distributions to shareholders.

Still, Atento may hold high strategic value to a private acquirer, and surely the latter would base its offer on a multiple of EBITDA to enterprise value. The question is: what would be a fair multiple? Let’s look at the company’s history.

In 2012, Bain purchased it from Telefónica for x7-x8 EBITDA. Then, in the 2014 IPO, the firm sold a 6.5% stake at $15 a share, which gave Atento an equity value of $1.1bn — or, with net debt added, an enterprise value of about $1.5bn, equivalent to x6-x7 EBITDA.

In 2017, Bain sold a 20% stake in a secondary offering at $9 per share. The deal gave Atento an equity value of $665mil — or, with net debt included, an enterprise value of about $1bn, equivalent to roughly x5 EBITDA.

Reasons that led Bain to accept such a discount are unclear, but the signal sent to the market caused great damage, for shares fell to their all-time lows ($4), from which they have yet to bounce back.

At such price, equity value comes at $300mil more or less, and enterprise value at $600mil — a valuation equivalent to x3 EBITDA. This certainly looks cheap if looked through the lens of standard M&A practices, but there may be a catch.

For instance, Telefónica still accounts for one-third of revenue. The master services agreement signed between the two companies has been extended till 2023, but what will happen beyond is unknown. What if the Spanish group decides to go for a cheaper alternative?

Among other risks, the high exposition to Brazil also stands out, for the company earns in exotic currencies but finances itself in dollars. In this regard, fluctuating FX rates could severely depress earnings.

With $200mil in EBITDA and $70mil in interest charge, a loss of confidence in Brazil’s currency — or, God forbid, the loss of the chief customer — would do tremendous harm.

So what is the company worth? Probably something between x3 EBITDA — its current valuation — and x7-x8 EBITDA — the price at which Bain purchased it from Telefónica in 2014. The private equity firm still owns 68% of equity capital, and Wellington Asset Management 8%: both of them are likely determined to maximize value.

Color yours truly unexcited for now.

(No position.)

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