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French Facilities Services Provider Atalian Outlook Revised To Negative On Plan To Buy Servest; ‘B+’ Rating Affirmed

          PARIS (S&P Global Ratings) April 23, 2018--S&P Global Ratings said today that it had revised its outlook on La Financiere Atalian SAS (Atalian) to negative from positive. We affirmed our 'B+' long-term issuer credit rating on Atalian. 
          At the same time, we affirmed the 'B+' issue rating on Atalian's existing EUR625 million senior notes due 2024. The recovery rating on the notes is '4', indicating our expectations of average recovery (30%-50%; rounded estimate: 35%) in the event of a payment default. 
          In addition, we assigned a 'B+' issue rating to the proposed seven-year EUR610 million senior unsecured notes, with a recovery rating of '4' (recovery estimate: 35%). 
          The rating actions follow Atalian's announcement on April 6, 2018, that it had reached an agreement to acquire U.K.-based facilities management services provider Servest Limited for a cash consideration of EUR610 million (GBP540 million), including EUR94 million (GBP83 million) related to Servest's 28.8% equity investment in Getronics Services UK Limited. The transaction consideration also encompasses two acquisitions that Servest is about to complete. All three acquisitions are subject to customary closing conditions and regulatory approvals, and will likely close during the second quarter of 2018. 
          To fund the acquisition, we understand that Atalian has secured a bridge facility loan that will be replaced by the proposed seven-year EUR610 million senior unsecured notes. The funding also includes a EUR17 million capital increase and a EUR20 million cash equity injection from Servest's management. In conjunction with the transaction, Atalian also intends to secure a new, upsized revolving credit facility (RCF) of EUR75 million. 
          The acquisition is almost fully debt-financed and will therefore result in a material but temporary deterioration in the group's credit metrics, with S&P Global Ratings-adjusted debt to EBITDA increasing to about 5.5x-6.0x post transaction, and adjusted funds from operations (FFO) to debt reducing to below 10%. Nevertheless, we expect the combined group's EBITDA generation to support a rapid deleveraging and improvement in credit metrics, such that our projected weighted-average credit metrics would remain commensurate with the current rating. 
          In our view, Atalian's business risk profile will remain fair following the acquisition. This is supported by the combined group's leading positions in the French cleaning and facility management segments, but also internationally, with combined pro forma revenues of about EUR2.5 billion and EBITDA of about EUR168.5 million in 2017. We also consider as positive Atalian's improved geographic diversification following the acquisition of Servest, in particular the reduced exposure to France (about 45% of the combined group's revenue), which we view as a market characterized by modest growth and intense price competition. Access to the U.K. market (about 20%-25% of combined group's revenue) will enable the group to diversify its customer base and product coverage, although we also understand that this market is very competitive and subject to price pressure. 
          Hence, we consider that the business risk profile remains constrained by the group's operations in a highly fragmented and competitive market, with limited barriers to entry, low margins, and significant exposure to wage inflation. We believe the group has limited bargaining power against clients and that clients can easily switch to another service provider. 
          The business risk profile also remains constrained by our weak profitability assessment, as we view the group's margins as below average compared with other facilities services providers. We note that Atalian benefits from France's CICE ("credit d'impot pour la competitivite et pour l'emploi"), a tax credit we consider to be an operating item that significantly supports its EBITDA generation. However, the French government has recently announced a 100 basis-point decrease in the CICE rate to 6% from 7%, which we expect will lead to a moderately negative impact on the French operations' EBITDA margin (about a 20-basis-point reduction) in 2018 and beyond. 
          We have revised our financial risk profile assessment to highly leveraged, based on adjusted debt to EBITDA of about 5.6x-5.8x in 2018 if we include Servest and other acquisitions on a pro forma 12-month basis, improving to about 5.0x in 2019. Gross reported debt pro forma the proposed debt issuance will amount to about EUR1.27 billion, including the existing EUR625 million notes, the proposed EUR610 million notes, other financial debt of about EUR40 million. We add back to Atalian's reported debt about EUR15 million of nonrecourse factoring claims, our estimate of operating-lease liabilities of about EUR56 million for the combined group, estimated debt issuance costs of about EUR20 million, and pension obligations of about EUR24 million. We also deduct our estimate of EUR137 million of surplus cash expected for the end of 2018 to arrive at the overall adjusted debt figure of about EUR1.254 billion. 
          The anticipated rapid deleveraging from 2019 will be supported by additional EBITDA contribution from Servest and other acquisitions completed or to be completed in early 2018. We also take into consideration the group's plan to deliver synergies related to procurement and other selling, general, and administrative expenses within three years of the acquisition. Nevertheless, we also believe that there will be some costs associated with the integration of Servest and achievement of synergies, and we do not adjust for these costs. 
          Our financial risk profile assessment is further supported by the group's positive free operating cash flow, given moderate capital expenditure needs and conservative dividend policy. This will also drive the gradual reduction of the group's leverage and improvement of payback ratios. 
          Given the size of the target company, the Servest acquisition represents a shift away from the previous strategy of focusing on mostly bolt-on transactions, which could lead to somewhat higher integration complexities. Despite the group's relatively strong track record of implementing its acquisitions over recent years, this strategy has also resulted in some volatility in operating margins. Our negative outlook therefore reflects that any operational setbacks or unanticipated cash outflow related to the acquisition may result in a slower-than-expected deleveraging, which could negatively affect the rating. 
          The negative outlook reflects that we forecast a temporary deterioration in credit metrics after completion of the debt-funded acquisition of Servest, and that potential additional unexpected costs may prevent the group from deleveraging as quickly as anticipated. This could result from higher-than-expected restructuring and integration costs, or inability to improve EBITDA margins in the international business, or significant price pressure resulting in subdued margins in the French and U.K. markets. 
          We could lower the rating if we anticipated that weaker-than-expected EBITDA generation (pro forma full-year consolidation of Servest) resulted in adjusted debt to EBITDA remaining above 5.5x and adjusted FFO to debt below 10% in the next 12 months. We could also lower the rating if FFO cash interest coverage declined to below 2.5x. We could also take a negative rating action if the group attempted another material debt-funded acquisition before it fully integrated Servest, or undertook exceptional shareholder distributions beyond our expectations, or if our liquidity assessment weakened.
          We could revise the outlook to stable if Atalian's credit metrics improved rapidly following the acquisition of Servest, in particular if adjusted debt to EBITDA decreased to about 4.5x-5.0x and FFO to debt improved to about 12%-16% on a sustainable basis. This could happen if the group faced no material operational setbacks while integrating Servest, resulting in improved EBITDA margins and strong cash flow generation.