The question is particularly acute for groups such as France's Teleperformance and its major American rival Concentrix, which published its eagerly awaited quarterly results at the end of last week. See also Investors snub Teleperformance's strategy.
At first glance, the American company seems to have avoided the worst, with revenue up 1% and operating profit up 3% over the first nine months of the year. There is also good news on the free cash flow front, which is up by almost half compared to the same period last year, although this does not take into account stock option compensation.
After three worrying years of stagnation despite nearly $3.6bn spent on acquisitions, free cash flow is expected to jump significantly this year. Concentrix plans to return approximately $240m to its shareholders over the full fiscal year, two-thirds of which will be in the form of share buybacks.
These figures should be put into perspective in relation to a market capitalization of $3 billion and an enterprise value (market capitalization plus net debt) of $7.5bn.
While share buybacks make sense—they are carried out at valuation multiples of no more than 5x EBITDA, similar to those of Teleperformance—they nonetheless illustrate Concentrix's aggressive style. With net debt of $4.5bn, representing between seven and nine years of free cash flow, the group is walking a tightrope; it cannot afford to make any missteps.
Concentrix has adopted a very aggressive external growth strategy to catch up with its French competitor. In this context, margins remain a key focus for analysts, as even the slightest deterioration will have a dangerous impact on solvency ratios. However, it must be acknowledged that Concentrix and its French rival, despite a slight erosion, are currently ensuring relative stability in this regard.
CEO Christopher Caldwell said at the end of last week that consolidation was still in its early stages and was likely to accelerate over the next two to three years. It remains to be seen how Concentrix will be able to finance this strategy with its share price at a low and its balance sheet so heavily indebted.
There is no doubt that the presence of a major shareholder such as Groupe Bruxelles Lambert, which holds 15% of the American company's capital, will be a significant asset here.
