Yet Another Value Podcast - Leo Kang from Plum Capital on $ATTO

Episode Date: September 30, 2021

Leo Kang, author of the excellent Plum Capital Substack, comes on to discuss his thesis on Atento (ATTO). With 3 legacy private equity holders owning more than 60% of the stock, Leo think the company is set for a sale, and a cheap multiple, continued operating momentum, and health dose of leverage could create for serious upside in a process.Leo's ATTO write up: https://plumcapital.substack.com/p/at... My ATTO notes: https://twitter.com/AndrewRangeley/st...Chapters0:00 Intro1:30 ATTO overview3:15 ATTO's ownership history7:45 The "Big 3's" incentive to sell9:20 Pushing back on the sales incentive13:50 Discussing valuation15:30 ATTO's operating momentum18:30 What does ATTO do?22:30 How does ATTO compete with?24:30 Is there a trend towards insourcing costumer service?28:15 What happens if ATTO's loses the Telefonica contract?33:30 Can we read anything into ATTO's lack of capital returns?37:55 Discussing the upside from the Telefonica contract40:20 Comping peer multiples43:05 Does the Telefonica contract line up well with a sales process?46:25 ATTO's attempts to move into the U.S.50:45 ATTO's foreign exchange risk52:55 Closing thoughts

All right. Hello, welcome to yet another value podcast. I'm your host, Andrew Walker. I'm noticing I'm starting to look a little bit homeless. I'll have to shave for the next podcast, but I'm excited to have on today. My friend Leo Kang, Leo is the author of one of my favorite blogs, Plum Capital. Leo, how's it going? Hey, Andrew, good to be here. And thanks for having on the pod. I know that you had some pretty cool guests over the years. So I've got big shoes to fill. Well, hey, I appreciate that. I thought you were going to tell me I wasn't looking homeless for the viewers on YouTube, but that's okay. You don't have to strip my ego. Let me start this podcast the way I do every podcast. The first way I do that is just a disclaimer to remind everyone.

Nothing on this podcast is investing advice. The stock we're going to talk about today, it's a little bit on the smaller side. It's definitely on the more liquid side. So it's an emerging market-focused company. So everyone should just remember extra risk there. Please go to your own due diligence. Second way I start every podcast with a pitch for you, my guess. I mean, you know, I've linked, people who read my blog know I've linked to Plum Capital like 14 times in the past six months.

It's one of my favorite new blogs, especially if you're an event-driven investor and you're not reading it, you're really doing yourself a disservice. So I'll just pitch the blog and go check out those write-ups and let the write-ups speak for themselves. But that out the way, let's turn to one of the companies you wrote up recently. I think you said it's your highest conviction position right now. The company is Atento. The ticker is ATTO, so I'll just turn it over to you. What's so interesting about Atento? Yeah, sure, Andrew.

So I'll talk about the company, maybe just a quick overview, business overview, the history of the company, and then we're going to the pitch, the thesis, and of course, the risks as well. And of course, you're welcome to jump in with questions, and I'm sure we'll go pretty in depth into certain topics. But in a nutshell, it's a CRM slash BPO company. Of course, we all know that it stands for customer relationship management and business process outsourcing.

So think of it as call centers or the back office functions, simple sales, outsource back office, etc. So they have a pretty strong Latam focus, about 40% of their revenues come from Brazil. another 40% from other Latam countries and about a little bit of the business, about 7% in the US and the rest in in Europe. So with the heavy Latam footprint, but a global focus as well, given those geographies. And I really like this company because it's a combination of a few different things. It's a huge business improvement story with the management team that's executing. they came in in 2019 and doing a wonderful job. But it also has a very, very strong event-driven angle, I think, with a buy-out thesis.

And we'll dig deeper into that, but I think the business will be sold in the next one to two years. And finally, there's some interesting fluid dynamics and some idiosyncratic aspects of the business that I really like. So we'll get into those topics too. But that's the nutshell of this investment thesis. Well, so let's start with, I want to dive into a bunch of different parts, but let's dive into the history of the company a little bit more because this is one of the few cases where I think the ownership history and kind of the shareholder history is actually really important, particularly, you know, who owns a company? I have this debate all the time. Like, who owns a company doesn't necessarily doesn't really change the value of a company, but it certainly can change the event path that the company wants to take, you know, like the classic thing, and I think this plays out a little here, private companies generally don't like to hold for more than seven years. So if you're looking at a stock and the private equity kind of controlling shareholders been in there for six and a half years, well, you know, there's a pretty good chance. There's a sale in the next six or 12 months,

whereas, you know, if it's a family that's held the stock for 50 years, probably, you're probably just relying on compounding. They're not going to, they're probably not likely to sell it. It doesn't mean it can't happen, but probably not likely. So let's dig a little bit further into the background of the company here. Yeah, absolutely. I'm glad that you started off with the background. I think you'll help the listener, sort of appreciate the story here so uh atento was initially part of telephonic and um it was sold to bane capital in 2012 as a part of a carve out transaction and at the time um telephonica was like the vast majority of the revenues they had some um revenue from third parties there was primarily a telephonic

business they carved it out um had an ms a sold it to bane and um bane um bane um i bing um i bing um i IPO the business in 2014. So it became a public company in 2014. And at the same time, in 2014, Bain decided to do a transaction where they took out a bunch of their equity basis by doing a loan backed by their shares in the company. It was held at the Lux Holdco.

And they did a 13 and a quarter percent pick note. And the investors in that note were three very very well-known firms, HPS, GIC, and Feralon, so very well-known companies. This is a classic private equity firm. It's a dividend recap. I mean, it sounds like there might have been a little bit different than normal one, but it's basically a dividend recap. Classic private equity maneuver, take some really high cost debt out, but use it to get

all of your cost-based out. Great for using your IRA. And heck, everything from there is upside, right? So I just want just for listeners who haven't seen a lot of private equity deal. just to give them the background that it might sound a little crazy, but this is actually pretty common for private equity. Yeah, totally agree. And thanks for that clarification, Andrew.

And what happened afterwards is that the business performance was pretty mediocre from an underlying trend's perspective. And they have a huge headwind from just FX, like Latam currencies, depreciating against the dollar and other hard currencies. And of course, 2020 happened, as we all know, COVID disrupted businesses all over the world. Then when the maturity came up in 2020, Bain decided to basically hand the keys over to the creditors because they couldn't refinance the paper. They didn't want to pay back the principles.

So what they did was tell those guys, HPS, GIC, Foulon, just take our shares, end the story. So that's how the big three, as I like to call them, came to have this 62% ownership of the common today. And as we'll get into it a bit later on, but that's why I believe that this company will be sold, because creditors, often these companies like the opportunistic credit investors that we mentioned, they're not natural shareholders for a publicly traded company. and they've been in this business for over seven years now. So if you think about typical private equity slash opportunistic credit fund lives, then it's really coming up in the timeframe that they need to monetize the asset

to return capital to LPs, make sure their partners earn their carry, et cetera, et cetera. So as long as they can make a decent IRA and get their cost spaces back as much as possible, maybe even a little bit more, they're highly, highly incentivized to sell in the next couple of years, in my opinion. Perfect. So let's dive into that, and we'll go more into the business fundamental piece later,

but for the listeners, let's just bring all the sizzle to the front and talk. In your piece, you mentioned they're incentivized to sell. You just give us why, but you talk about the timing and what you think kind of the incentives around the price can be. So can you dive into those,

and then I'll probably provide a little bit of pushback on the back end of that. Sure thing, yeah. So based on the share transfer agreement of 2020, it's been publicly disclosed what the cost basis is for the big three. If you assume that full pick 13 and a quarter percent over the time period, we know that the cost basis of the big three today, it's just a bit over $55 a share, going to about 60, low 60s per share. in June of 2022. And I must mention that as part of that agreement, the big three agreed to a two-year

lock-up on their shares to kind of, you know, show some confidence to the market, give some room for the management to execute on their business improvement plan. So it's, you know, I think it's likely that we have to wait until June of next year to kind of hear any news about strategic alternatives or anything of that nature. But, you know, that's within the next nine months, which I kind of see it as very fun and center of, you know, typical event-driven pictures, something happening within the next 12 months, say. So I guess my two pushbacks here would be, A, you said their cost basis is, I think the way you're clipping their cost basis is the pick. It picks at 13 percent. So you're increasing their cost

basis by, you know, 13% compounding every year? Am I thinking about that, correct? Because they actually put a lot less money in. Like, if they, if they sold at the $60 cost basis that you're saying, I think I'm looking at slides that they'll have in June of 2022, they'll actually have made 13% IRA is what you're saying, right? Absolutely. That's true, Andrew. And this is important because if you're running a vehicle like this and if you're the manager, you really need to make those underwritten returns for your fund to start earning carry in that investment, whether you do it on a deal-by-deal basis or whether you do it from a consolidated fund perspective. So if they sell much lower than, say, $50 a

share, you're right. They can probably preserve their principle, but they're unlikely to make huge fees and performance fees off that. So that's sort of the idea behind the numbers here. And just to give everybody, I mean, as we're talking, I haven't looked at the share price since last night, but the stock was under $30 yesterday. So I'm sure it's still under $30 today. But, you know, so we're talking June 22. You think they're incentivized to get a sale at 60. And we'll talk about why the fundamentals maybe back that up. But obviously, 30 to 60 and under a year would be, you know, that's the type of stuff that gets you some real incentive fees and everything. But I guess my second pushback would be, you know, like we're talking about it. You're saying 60 again, because that's what gets them, you know, it gets them all their carry, gets them incentivize. all that type of stuff. And I don't, I don't disagree. They would like that number, but,

you know, I would like all of my stocks to double tomorrow and sell for a double the day after that, it's any number of firms, right? But I don't get that. So I guess I can't get that. So I guess the thing here, like, if I was a bidder and I looked at this company, I would say, oh, non-natural owners, small public float, these non-natural owners absolutely want out. Like I know they're not, they're kind of, they're not forced for sellers, but, you know, they're not natural holder, so I can probably get a good deal. So if I was looking at that, I would probably be saying, like, yeah, if I bid 60, they'll definitely hit that offer because it'll get them to, they'll definitely hit that offer

because it'll get them to their IRA. But why wouldn't I try to go to them with a 35 offer, a 40 offer, which would still work out for people who are buying the shares today. But, you know, that 60 number, it just seems like they've got a wish. And we're almost projecting a wish onto the company. Does that make sense? Yes, what you're saying makes perfect sense. And I think if they struck a deal today, I think it's unlikely they get the full 50 to 60,

but they have a little bit of runway until June of next year. And now it's probably a good time to talk about the business fundamentals. Well, I think that it might be. One more thing, and then we're going to go to business fundamentals. Because the business fundamentals are actually quite good. But one more thing. why June of 2022 is when their lockup expires, why do you think that, I mean, obviously the lockup expires, but why do you think that's the timing for a sale? Because there are plenty of firms

out there with big private equity owners who kind of don't have a lockup. But they also know you can't get out of a big position without crushing the stock. So you know they're going to sell at some point or the company's going to sell. But why is June of 2022 kind of this target date that we keep talking about? Sure. I just meant that as an earliest possible day, where a sale is possible. I think it's really dependent on a number of different factors, like market conditions, how far they are along their business improvement plan,

where the general sort of market sort of conditions are at the time, and how frothy the M&A market is, who is ready and available to bid on the asset, etc. So the story could easily be that they sell the business in two years or two and a half years. I just say that the June, date as a first potential sort of date where transaction could possibly be announced. It might even be announced a slightly earlier than that, but, you know, short of a

some sort of a shareholder agreement that releases them from a lockup, that's like the earliest in which they could do something, I believe. Perfect, perfect. Okay. So let's go to business fundamental. So let's just start with a simple, I guess this is more business fundamental, this valuation, but let's just start. What are we about at today's share price, you know, just under $30 per share?

what is ATTO valued at? And then we can kind of start talking about the actual, moving from the numbers and talking about how the business is performing. Yes, great intro, Andrew. So, you know, I consider myself a value investor, first and foremost. And, you know, I wouldn't come on your podcast and get you know, a software company trading at 30 times sales. So a tenter's numbers are pretty compelling.

So the company has, well, the fiscal... 2021, EBITDA is likely to be around 200 based on management guidance. And, you know, if we take a conservative view of next year, I think EBITDA is going to be around 130 to 140. And the CAP stacks, so the enterprise value is trading at around five and a quarter times next year's EBITDA. And if we look at the free cash flow profile by subtracting maintenance CAPEX, the cash interest, cash taxes, and some working capital investment, you're looking at something that's

close to 20% free cash flow yield on next year's numbers on the market cap, because what I'm getting to is about $70 to $80 million of free cash flow next year. If we add back the growth cap tax, they're investing to really win new business, upgrade the company, et cetera. If we add that back, and the normalized free cash flow is about 70 to 80, which is a very generous profile, I believe, for a company like this. And certainly the valuation is very undemanding. Yep. Yep. And then so let's talk about, you know, a little bit more about what the company does. And I know they, I'm sure you'll get into this, you know, they put out in November 2019, they put out a plan. I think they're ahead of the plan. They're going to hit it. And they mentioned

in November, this November, they're going to put out a new plan that has kind of more forward-looking projections. So let's talk about what they do, the momentum, and kind of what you're looking for going forward from them. Sure things. So the business, as I told you earlier, underperformed historically from, say, 2014 to 2018. And the management team, including the CEO and CFO, were both replaced with fresh blood, Carlos and Jose came in as CEO and CFO respectively.

When was this? Back in 2019, both very highly respected people in the industry. And they immediately released a three-year business improvement plan and presented that at the investor day, which caught for EBITDA margins to increase from close to. 10% when they join to around 14 to 15% by 2022. And to give some context for our listeners here, the company likes to report EBITDA on an IFRS basis. So this is EBITDA pre-leases, which can be a little confusing for people. But I just wanted to give out that context.

And let's us talk EBTA consistent with the company so I don't cause massive amounts of confusion for our listeners. But whenever we say EBITDA, unless we clarify it, it's the consistent EBITDA that the company reports it, which is pre-leases. They have about 45 to 50 million of lease expense per year. And so to answer your question, yes, they came in in 2019. They put in that business improvement plan. They want to hit about 13% EBITDA margins in 2021. I think they're already pacing a slightly ahead of that because there's some seasonality in the business.

Second half is usually stronger than the first half, and they had a very strong second quarter this year. And based on my sort of understanding of the management team, it's very much, you know, under promise and over-delivered type of management team. They're very capital market savvy, you know what they're doing. and certainly have the historical track record to back up their status in the industry. So I'm super excited. I think they're doing all the right things. And we can dig into each of the sort of like what they did so far and what they're doing to improve the business. But the trajectory of hitting that 2022 guidance seems to be well on track.

Perfect. So let me shift a little bit from the numbers to talking about what the company actually does. So they provide BRPM, CRM, so lots of buzzwords there, right? But my understanding of what they really do is, like, for Telefonica. Telephonica wants to operate a customer service center, right, a call center or something. And instead of operating themselves, they'll hire Atento and a Tento will operate that for them. Is that kind of the main business, am I thinking about that correctly? You absolutely right.

So about 60 to 65% of their business is traditional call centers. So, as you said, you know, customer support, you know, tech support, basic sales, upselling, marketing, very basic business, business outsourcing. But the other 30 to 35%, which is the really exciting part of the business, is, you know, performance-driven contracts where the content to actually solves a specific problem for the customer related to CRM and BPO. And based on the monsters that they hit. Can you give an example of a, yeah, could you give an example of like a problem that somebody would hire them to go solve? Yes, it could be something as simple as, hey, we want to hit this amount of upsells for this, you know, customer service, whether it's a telco service, or they want to do some sort of marketing plan and they want, you know, a certain number of, you know, eyeballs for a certain budget, etc. So, you know, I'm purely a public side investor. I haven't ripped up one of these contracts and gone through, you know, line by line.

But, you know, it's a very diversified company, about 400 customers. And about 30 to 35 percent of the businesses, the more sexier, like, you know, contract where it's more value add than a straight cost center business. So the more value add, like, long time listeners or readers know I love the cable business. And, like, you know, Charter and Comcast are both trying to move from cable to mobile. And the real way they do this is if you call and you say, hey, I want to get your cable service at my house or I want to change my plan. I'm having an issue. They basically end every call.

And they say, hey, we can save you $30 a month if you switch your mobile phone service to us. You're still going to be on a great network. You keep your phone. You just switch over and save $30 a month. So when you say solve an issue is, is Atento basically, is that what they're doing? They're going to teleponica or a different customer and saying, hey, hey, give us a contract, we'll upsell the customer. And I don't know if they're getting paid a piece of the upsell or a success fee or whatever,

but it's basically let us do this for you. We'll upsell the customer, get them on better contracts, get them higher margin. And you guys just pay us extra for that. Is that kind of what we're thinking about? Yes, absolutely. They would either have some sort of, you know, a revenue share component or a performance fee component that allows them to earn higher margins than their traditional call center margins. for example, Telefonica is and was about, you know, 9, 10, 11% EBITDA margin business.

And they want to upgrade to, you know, at least 15%, if not, you know, high teens or even 20s. But that's sort of the trajectory of the business. They're like actively deemphasizing the basic call center low margin business and win more like more sophisticated contracts that earn. high teens margins, if not, you know, low 20s margins. Perfect. Perfect. And then who are the competitors here? Because I do know, I'm looking at their deck on the right hand side of my screen here, Avaya, which I remember when they went bankrupt, they had a bunch of different services. But I think this, I actually think the customer

service piece of the business was considered a crown jewel, if I remember correctly, of the business. But so Avaya looks like they might be a competitor or they might be a partner in some streets. We'll talk about that. But who else are they kind of competing with? I know they'll also compete with internal operations, but I'm more just thinking who do they compete with so we can talk a little bit valuation benchmarking as well. Yeah, great question. So you're right. You always compete with the internal arms of these large businesses, but a lot of public

competitors that people are familiar with could be teleperformance, concentrics, teletech, sitel, Sykes. There are a whole host of these well-known businesses that provide CRM and BP services. What's special about at Tento is the geographic mix. So it's the number one BPO provider in Latam. So they have that leadership advantage. And they're a little subscale in the US and Europe, but they're growing very, very quickly because of the demand that we're seeing in these days, you know, double-digit revenue increases in the US and Europe. So that's going to be a higher focus going forward. And just taking a big step back, why is the industry on

fire? As you know, you know, tech, digital, anything related to, you know, think of the, think of any COVID beneficiary and how much capital has been poured into, you know, the tech industry, anything related to digital, whether it's VC funding, you know, guys like Tiger Global, putting in unlimited capital to these businesses. And you have like these kinds of, companies are growing like triple digits a year, and they really need to outsource a lot of their back office functions to guys like Attento because, you know, they're busy winning new business at triple digits increases it per year. They just don't have the resources to do a lot of these back office functions internally, which drives demand for, you know, the business

products that the Tento offers and the industry as a whole as well. Let me provide I don't want to say pushback, but just one thing, you know, as we're talking about and as I'm thinking through it, that sticks out to me. Because we mentioned they do compete, especially with the larger contracts. And we're going to talk about the telephonic risk in a second, but they compete with companies internal things. And the two businesses that jump out to me with customer service are charter when they bought Time Warner and they bought Bright House a couple years ago. That's one of my favorite cable companies. If people who've read the blog, no, I talk about them a lot. But one of the things was, hey, we're actually going to take our costs up in the short term,

because we've done lots of outsourcing of customer service, we're going to bring all of that back in-house, and we're going to use that to drive our net promoters score up. And by doing that, we actually increase customer lifetime value. We can increase upselling, all this sort of stuff. So I think of them. And then I think of someone like Amazon or even Peloton, like all these guys. Now, these are great brands and huge businesses, right?

So there's plenty of other fish in the sea, but all these brands, they pride themselves on their customer service. And I think they own their customer service. service in order to do that. So I don't just worry about a Tento that they compete with the internal thing. I worry that the trend has actually switched against outsourcing to insourcing. But again, I can see lots of different angles to that. So I'll just pause there and let you kind of comment on that.

Yes, I think you make several great points. And I always think of it the other way that customer service has become so important that additional dollars are being poured into the industry. And there's obviously limits to what can be done in-house. So, you know, I'm sure that, you know, businesses as, you know, reliant on CRM as, say, a Peloton or a Charter, as you mentioned, they probably have a very sophisticated strategy as to what can be done in-house and what can be outsourced.

But it's the argument of rising tide lifting all boats. the dollars coming into the industry. So, yeah, there's going to be some puts and takes, but ultimately, guys like Tento will benefit in a very material fashion. Perfect. Perfect. And then I see, again, I'm just looking at their debt. So I don't know the answer here, which might not be the sign of a great question. But on one of their slides, they say NPS improved by 14% Rishi record high year over year for 2020, is that their customers, NPS, with, them or is that their customers, customers, NPS with the customer's core? Because either one's great. I'm just wondering which one it is. Yeah, I actually don't know the exact dance off the

top of my head. I'm sure they, you know, smart about marketing and maybe they, you know, cherry picked some data from here and here or there. You know, of course, we expect all companies to do that. I think that, you know, being a very diverse, provider of having almost 400 customers ex-telefonica, the company is really well positioned because not a single contract is material enough to make or break the business. And I'm sure that, you know, Tento does a great job for many customers and, you know, some customers, you know, might have a different experience. But just given the tailways in the industry and how diversified they are, I think they're very well positioned. And your question about NPS, it's a fair

one. And I'll be looking into it. Look, either way, it's good. If you say NPS is up 14%. Now, I've discussed on podcasts recently. I don't know if you can ever trust the company's NPS score when they publish it. But either way, you know, it's good, whether it's the customers or customer customers. You said just now, not one contract can break the company, which is interesting because I don't disagree. I think I think Atento would survive if the contract we're about to discuss got broken, but I don't think it would be pretty for the equity. Telephonica. Again, this was, as you mentioned, they started out as Telefonica's internal thing. Bain took them out, spun them out. They've been growing their external Telephonica business. I think it was almost 100% when

Bain first bought them. A couple years ago, it was 50% by 2020 Telefonica made up just more than 30% of their revenue. But the Telefonica contract, expires for all countries, except for, if I remember correctly, Brazil and Spain, which Brazil and Spain are a lot of the telephonic revenue. Expires for all countries at the end of 2021. Brazil and Spain expire at the end of 2023. They were asked about it on the Q2 call and the CEO said, hey, we're in discussions, we're talking to them, all this type of stuff. That, you know, we're at the end of September right now, right? So there's three months to go until this contract expires. Massive customer, massive contract. It's starting to get to the point where I say, oh, what's going on with that

contract? I mentioned charter in-house stuff. Is Telefonica looking at other explorers? What would happen if this didn't go? Like, you know, when do we start getting worried about the Telephonica risk? And when do we start getting worried and are you worried? How are you thinking about that? Sure. I think it's one of the biggest questions that people have as their diligence to company. And I've gotten comfort from this risk because, you know, ultimately, you know, the MSA, I think, will be renewed. I think they have a great relationship. But, and the CEO, Carlos, is in active discussions with Telephonica, I would imagine. But ultimately, the business with Telephonica is divided up into various arm's length contracts with their sub-business units.

So they have about 108 contracts with them as of 2020. As of 2020, they're all independent. They're all governed by each contract. And each contract term is roughly three years. So it's not like these are super long contracts. They're always coming up for rebid and a tento is winning their fair share of the business. But one of the biggest, you know, the ball thesis elements that I have is the increase in margins. the company is actively de-emphasizing the telephonic relationship.

What they're doing essentially when the contract comes up for rebid is putting their foot down and saying, hey, we need higher margins. And if you're not going to give us that, you know, we can move on and part ways with that sub-business unit because, you know, 9, 10%, and 11% EBITDA margins, it's not profitable for ATENTTO and the management team's really, really pushing to increase margins. So, you know, if they're not winning, you know, at least, you know, 13, 14, 15% margins from the new contract that are just, they're just saying goodbye. And we recently had some great news because they signed up a new contract with them very recently. And I think it's a quarter roll that was done at 15% where Telefonica had trouble finding a replacement for another contract, you know, that came up.

Attento was the only one position well. so they took it, signed up for 15%. And I think we'll see a lot more of that going forward because telcos are realizing that every BPO is trying to walk away from them because the margins are so low. So eventually the power struggle kind of shifts back to the BPO's favor. But I think it's a risk that is easily sort of digested once you really started the business.

And I think what's going to happen is telephonic a business will, you know, slowly decline maybe two, three, four percent a year. But the rest of the business, the multi-sector revenues are growing at double digits right now. The second quarter was, you know, up 20, 30 percent, depending on sort of the region and the end market. But, you know, the company's reliance on Telefonica is going to be massively reduced in the coming years. So Brazil and Spain are the vast majority of the Telefonica revenue. If I I remember correctly, right? That is correct, yes.

Yeah, and those aren't up to 2023. So I guess the kind of semi-bearcase margin of safety way to look at it would be, hey, you know, everything else is, as you said, everything else is going 20 to 30 percent. So the vast majority of the Telephonica revenues don't expire. It's for another two years. So what happens is, you know, every year with that 20 to 30 percent growth, you see Telefonica go down as a percentage of sales buy. It's about 5 percent, just rough, rough number.

So right now they're just. over 30 percent. By the time this expires at the end of 2023, assuming the rest of the company keeps growing, it's down to, let's call it almost 20 percent at that point. So, yeah, it would suck to lose a 20 percent customer. If you could renew them, especially at higher margins, that would be great. But by then, they're 20 percent. So you could kind of afford losing them, right? Because the rest of your business is growing, you're growing. So I think that does make sense. Let me provide one more pushback, though, right? They published their capital allocation framework, right? From 2017 until 2019, they actually returned, I'm looking at it,

they returned, they did $125 million of free cash flow, and they returned 35% of it to shareholders through basically 50-50 dividend share buyback. They stopped that, right? And they haven't bought back shares this year. They're not paying a dividend, any of that. A lot of that is COVID legacy, but they're ahead of their financial targets. They're basically at their long-term leverage target right now. the stock, despite a huge run, the stock, as you laid out earlier, is pretty darn cheap. So I guess my question would be, if the company is so positive on their kind of financial futures, why aren't they either buying back shares or paying out a dividend right now, right? Either would be great.

You've got some control shareholders who probably have real clear view on the company's value. Is the fact that they're not returning capital to shareholders right now, is that evidence of one of two things, one being inside a shareholder. don't believe the company's cheap here, or two, and it can be a combination of one and two, two being the company is terrified that they're going to lose all this telephonic of revenue, and if you lose 30% of your revenue, your leverage goes straight up, your stock looks way overpriced, all that. So is there a red flag in the fact that they're not returning capital, is my long-width question.

Sure. So maybe I'll just start at the end by saying that telephonical risk is probably a little overblown in the way that you sort of phrased this. But it's a good question nonetheless, and I think that I'll say, you know, it was carved out of telephonic and handed over to Bain in 2012 and it's now 2021. So given that average contract term is three years, they already cycled through a lot of the contracts and they had no trouble winning the business again. So I think the slow bleed scenario makes a lot of sense. I don't think you ever see 20% revenue declines in any one year. I mean, you know, nothing's impossible in this world, but I just don't see that as a sort of a realistic scenario.

And on the capital return question, I think that's an excellent question. And there's a very simple answer, which is they're just investing a lot in growth CAPEX. So I think they'll spend about $17 million this year on CAPEX altogether. They say maintenance CAPEX is about $30 to $35 million. dollars. About 15 to 20 is sort of catch up CAPEX. So this is kind of really basic stuff like upgrading their computers, workstations, making sure they have Windows version 10 as opposed to version 7, et cetera. And that's going to roll off pretty soon in 2022 or 2023. And all the remaining CAPEX call it, you know, 20, 25, 30 million dollars. That's all for growth CAPEX. And

management team has told us that they underwrite to at least 25 to 30% RICs when they spend growth CAPEX. They had some really incredible example in the most latest earnings call. They said they made like 150% RICs on the most recent spend. I'm sure it was like invalidation or cherry pick. But, you know, I think at least it drives with a lot of new contracts they're winning. For example, in the U.S., their new contracts are running at 20% EBITDA margin, which is exceptional improvement of like the 10% margin telephonic of business. So I think the story kind of fits together really nicely.

And, you know, if you're really getting those return on capital, then of course you should be reinvesting in your business and not paying a dividend or buying back your shares. And I'll just close by saying that they do have a small buyback in place. I think they buy back a very, very modest amounts, you know, every quarter. I'm okay with that because, you know, if they're really earning those returns on the growth cap tax, I just want them to reinvest in the business. And I want to come back. I was just looking at my notes because you said something on the U.S. margins of partnership that I want to come back to. But I want to put a bow on the Telefonica conversation first. So I push back on a lot of the bare points on the Telefonica case.

But let me go the other way and provide two cases I could see, right? The first would be telephonica is a big company and managing their, managing their customer service, whatever it is, that's pretty strategically valuable, right? Like you're dealing with the company a lot. Would there be strategic value to a buyer, a strategic buyer, not a financial buyer, a strategic buyer, buying a Tento? I mean, obviously it's for the financials, for the synergies, all this, but getting that telephonic relationship, do you think there'd be strategic value to the right buyer?

Oh, absolutely. I think that's a great point. And probably it's kind of the extra gravy, so to speak, in the upside case. But I think there are a lot of companies that would love to own a tento. I think the really obvious candidates, companies like concentrics, where they have publicly said, you know, we'd love to grow up, you know, global footprint, especially, you know, build our Latam business and we want to do acquisitions. So I think there would be like the number one. bitter. I mean, they basically just described to Tento, right? Like, hey, the markets that they're in, that's what we're targeting, the business they're in, that's what we're targeting. We'd love to get that, yeah. Yeah, but, you know, there are some other contenders too that are strong, like T-tech, for example, or even teleperformance. A lot of other, you know, public companies will be around this asset. And, you know, we're not even discussing, like, all these are smaller BPO businesses that are in private equity portfolio. So what could these happen is private equity firms, XYZ, come in, like, you know, they bid for the company

with the intention of merging it together with their internal BPO business. So, you know, I'm speculating. I'm only working off of public information, but I think if there was an auction for a tento, even today, you'll see a whole host of strategics, financial buyers with a strategic angle and even just pure financial buyers. I think that, you know, given the tailwinds in the industry and the free cash flow potential of this business, you know, like a mid-sized private equity firm could easily underwrite this for like a 15, 20 percent return in five years with the intention of selling it to a larger strategic down the road. So thank you for that, you know, leading question. But, you know, that's softball. I just loud up to you. Hey, you mentioned a, you mentioned

a couple peers. I know you've talked about a couple precedent transactions in the space and stuff. And just to give people an intento, we walk through the math that it's somewhere around or a little under six times EBITA right now, I think was the math we walked through if I'm looking at my model correctly. What are some of the peers trading at or what are some of the precedent transactions at just to give people I need an idea for kind of what the baseline would be here? Yeah, great question. So a lot of these public peers, if you just do a huge list of them and take the average or median, you see, like, very healthy, you know, low to mid,

you know, low teens, midteens, even with double multiples. But obviously, we've got to account for the fact that a lot of these comps are much bigger businesses, much more global with better margins. So I don't think, you know, Tento's going to go for 10 times. I think that's way, way too aggressive.

But, you know, we could choose for a high single-digit multiple, I think, and still be super accretive to an acquirer. I mean, concentrices currently trades, you know, 11, 12 times. They had, like, great earnings yesterday or a couple of days ago, and the stock was up nicely. And just to give you some other data points, like, you know, Citel acquired Sykes. Sykes is a very close comp.

They bought it for 10.3 times sort of the street estimate EBITDA for 2021. And we don't know what the synergies were because Citel is a privately owned company. but, you know, the seller's multiple was 10 times, very, very healthy. And we could also look at the multiple for guys like when concentrics acquired converges, they bought it for seven and a quarter time, sellers multiple. And even seven times on the tento, the upside on the stock price is pretty healthy and very compelling from, you know, low 20s or $30 stock price. It's the power of leverage, right?

Like, if they're at six and you get, you get seven, it doesn't sound that great to get one turn. But A, that's almost 20% upside on your turn. But then when you throw the leverage on, it gets really, it gets really juicy. Now, as, you know, one of my recent podcasts was in Altis. And as you know, if you've been invested in Altis, leverage works both ways, right? You shave it, turn them all off a leverage stock. And it is not pretty for the equity. Last thing on Telefonica, again, this is a little bit softball.

But I do think the timing of the majority of the Telefonica MSA expiring at the end of this year, I do think it actually lines up nicely with a sale thesis, right? Because let's say you extend this MSA, and I think the natural thing would be to extend all the MSAs to expire kind of around the same time. So because the major ones are Brazil and Spain that expires 2023. If you extend the MSAs for two years, then you can run a sales process, say, hey, you've got fantastic visibility into all of the, into the earnings, the economics, everything for this company through the sales process and for a year to 18 months after. And then you can go buyer, whoever you are, you can do whatever

you want with the telephonica business, right? You can try to renew it. You can try to get better margins. You can try to expand it, whatever you want. But you've got fantastic visibility. So I almost think it lines up really nicely. Extend the MSA now, run a sales process to meet all those IRR targets that you talked about early next year, buyer closes middle to late next year. They've got a full year to integrate and then figure out what they want to do with the telephonica process. Yes, I think there was a great summary, and I totally agree with the observations you made. And I will be looking out for any public clues in the coming quarters.

They obviously have the third quarter earnings in November. They're also planning to have an investor day in November. And, you know, I have no idea what they're going to release, but, you know, would hopefully get some clarity into what their vision is for the coming years, whether they, you know, give new targets for the margins in the outer years or they give some clues about potential sale, strategic alternatives. I'm purely speculating, but there are a lot of a near-term catalyst for the stock because I think the management team is heavily sandbagging for the second half of 2021. We have an investor day coming up. And by the time it's early to mid-next year, we might wake up one day and see a press release, Tento announces strategic alternatives, in which case you probably expect the stock to jump 20, 30% on the announcement, and then maybe, you know, react further from there given further data points on, you know,

who the buyer might be, what the valuation ranges might be. So it's going to be a very exciting 12 months, I think. And I think the only reason why the sales process may not happen is if the business improvement is so strong that the big holders, whether it be HPS, frown, they just tell themselves, hey, you know, revenue in EBITDAQA is so strong, let's be a little more patient, wait another year or a year and a half, and then sell the business later for much, much high value. I think that's a reasonable possibility. And in that case, who knows where the stock price might be? You know, I don't want to be, you know, I don't want to have my head

in the sand, but you do the math. It's not crazy to get 75 plus stock, you know, stock price in that scenario. Yeah. And they would also, as you said, these are IR-driven investors. So even if they thought to themselves, hey, it would be better to wait 12 to 18 months to run this process. get the, I don't want to say turn around, but yeah, get the turnaround, get the financials a little bit more juiced. I would bet, because this is a capital light business that is right on the verge of hitting all their financial leverage targets, I would bet you're looking at a juicy kind of re-lever the company's special dividend in the interim, which, you know, will help their IR. It would help your IRA. It helps everyone's IRA. Last couple of questions. The U.S. business, right?

They want to move into the U.S. business. They've been very clear. I think the U.S. business has gone from nothing to, I think it was about 7% of their revenue in the last quarter, if I remember correctly. And they're approaching in an interesting way. They mentioned that they're doing it through a partnership, which I think is kind of capital light. But I was curious on the U.S. business, why they think they can succeed, how the partnerships are structured, and that will lead into a follow-up question. You're exactly right, Andrew. They have some partnerships, but they're also building the business from scratch. They recently signed up to new leases, I believe, some in Florida, some in Texas.

So, you know, the U.S. business is building and ramping in earnest. They're really dedicating a lot of resources to it. And I think what they did was renegotiate a lot of leases through COVID, like every other business, and use some of that savings to reinvest into the U.S. business and sign up some new leases at pretty attractive terms. Yeah, the U.S. growth should be really strong. I think the second quarter numbers were about 33%, if I'm not mistaken, year-over-year growth. You know, some of that was FX benefit, but the organic trends are really, really strong. So that brings me to the second part of the question. You know, they're going to the U.S. business through the partnership. And I was just wondering, it's not like these guys are crazy, small or anything, but they are small. smaller than a lot of the competitors we've been discussing and everything. And I just

wondered, as the world trends more towards, you know, because of the internet, most businesses were seeing, most businesses scale larger. You're kind of losing the mom and pop businesses or the smaller business. You're tending to get larger business, right? The economy is concentrating. And I was wondering if they are on almost the wrong side where, yeah, they've got a lot of Latam strength and they're trying to move into America. But if I'm Uber or any number of companies. Telefonica obviously does their MSAs on a local baseness and they've got like 100 contracts with Atento.

So maybe this disproves it. But are they almost at a disadvantage in selling to a lot of these larger guys by somebody who can just say, hey, Uber, just go with us and we'll handle your global service needs. And obviously, there's a lot of companies other than Uber. But, you know, if the economy continues to get bigger, is Atentzo almost a little bit disadvantaged versus these larger CRM players? I think you bring up a great point. And I think I agree with most of what you said.

I think there's certainly a lot of concentrics, for example. And, you know, there's no doubt that someone like concentrics is a better business. And you see that in the margins. You see that in the multiple. So I would say a lot of that is in the price. But at the same time, a geographic diversity is really a competitive advantage these days because you can go to large customers and say, hey, we have a global solution for you. We're not just a leader in Latam.

We have some exposure in the U.S. We have some coverage in Europe. And that really helps win a larger, more global contracts. So I think they're doing the right thing by diversifying their footprint. entering the US market. And I would just close this point by saying that it's all possible because of a very positive macro environment where the pie is big enough and growing fast enough

that guys like a Tento can participate in that growth and coming to the US and not be blocked out by incumbents with market share that are just much better than you. There's enough room for everyone. Cool. Last question here, and then I'll let you wrap it up. A lot of their revenues are coming from Latam, and I think a lot of their debt is exposed to U.S. dollars, which obviously creates currency mismatch risk. I think they've done some stuff to alleviate that concern and hedge it out, but it's still a concern.

So, again, I'm not an expert on the company. I've just read some of the filings and looked, but I know you know a lot more. So just talk to me a little bit about the concerns around dollar mismatch, currencies, all that type of stuff. Yeah, great question. So about 70% of their revenues are in soft currencies. So think of hard currencies as dollars and euros. And that's about 30% of revenues. And 70% of the revenues are in resilient REI, a bunch of other Latam currencies. So there's definitely some FX risk element to this investment. But at the same time, the company has hedged the coupons and the principal for the secured notes.

That's like a big relief to the capital structure. And I would just say that, you know, as you know, as any global investors know that let-time currencies have been getting crushed versus the dollar since, you know, for like a decade, if not longer. And there's a potential argument to be made that, you know, in today's world where inflation is running high, commodities are benefiting. What if, like, you know, Latam currencies are loosely correlated with the commodities, sort of commodity prices? And if Latam currencies really rebound versus the U.S. dollar, I think of the upside.

So I think it cuts both ways. And I think sophisticated investors might even think about hedging in their own portfolio. It's just short a little bit of the Brazilian RIA versus the dollar in your own account. And I'll just echo your comment. None of this is investment advice. I'm certainly not an investment advisor, but sophisticated people out there can come up with their own solutions. I was about to provide that disclosure as well. I was also laughing a little bit because I know you and I have talked a little bit about some of the Bitcoin miners that are public and have gone crazy.

You've written up MKTY, I believe the ticker is, a couple of times. So when you were starting to say hard currencies versus soft currencies, I thought you were going to say all currencies were soft except for Bitcoin was the old, the one true. hard currency or something, but I was laughing. Let's see. I think we've covered a lot with Atento. I should have mentioned this earlier. There's going to be a link to Leo's write-up, obviously in the show notes. Everybody should go check that out for a little bit more. But is there anything on a Tento that you think we didn't cover? You wish we had covered a little bit harder. Just any last thoughts you want to leave our listeners with? Sure. I think there's a little bit of a sexy angle on the float, which I'll talk about in just a couple of minutes and we'll wrap it off.

It's a very interesting scenario here because a lot of the company's flow doesn't trade. I mean, the shares don't trade because they're locked up by either the big three or they're held by institutions that have been with the company for a long time. You know, large hedge funds like Santa Lucia and some other 13F filers own a bunch of the stock. And I personally spoke with several large shareholders and very sophisticated firms and individuals who really believe in the business fundamentals and the buyout thesis. So I think free trading shares right now, it's only about 7 to 8 percent of total shares outstanding. So, you know, there's no like massive short interest or anything to entice the, you know,

the fast money crowd, but at the same time, you know, I would argue that, you know, once one, two or three, you know, deep pocketed, sophisticated investors decide to step in, there's not that many shares to go around, which creates a very interesting dynamic. But, you know, that's not part of the fundamental story. So I'll cut it short here, but that's part of my thesis. I guess they announce a killer quarter or the November investor day. that they're talking about comes out and they say, hey, we're going to beat our margin target this year, we're going to beat the margin target next year, and our long-term margin target is going from, you know, we had said at a 15, we think we can get to 18 and a half,

or the U.S. business is on fire. We're announcing a big customer win. And you kind of get a really nice pot because it's small float and maybe it squeezes a little bit more than it normally would. That makes tons of sense to me. It makes tons of sense to me. Cool. Anything I want to talk about before we wrap it up? No, I'll just recap the pitch by saying it's business improvement story with an event-driven angle, a group management team, and a tight flow, which I think is a very exciting place to be as an event-driven investor perspective. And Andrew, thanks for having me on. It's always a pleasure to speak with you. I discovered your blog about, I think, a year and a half or two years ago, and it's got a ton of value from your

content as well. So I just wanted to say thank you. Well, hey, I appreciate it. appreciate that. Like, everybody's check out Plum Cathedral. I've gotten a ton of value from your write-up, your write-up and stuff as well. And I believe you are getting married this weekend. So I want to be the first podcast host to extend my congratulations. And I think it's out in Hawaii. So wish you safe travels and, you know, really enjoyed. It's going to be a great day. Yes, Andrew. I'm super excited for the trip, obviously. And, you know, I'm so happy to. This is getting recorded. So you better say you're super excited for the trip. Cool. Well, hey, Leo, I hope you have a great trip, but I really appreciate you coming on.

Looking forward to reading some more Plum Capital write-ups in the future and having you on for the next one. Thanks, Andrew. See you later.