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“I believe it represents another big step forward in our strategy to consolidate the fragmented travel retail industry“ |
Julián Díaz CEO Dufry Group |
SWITZERLAND/GREECE. Dufry confirmed this morning that it has signed an agreement to acquire 51% of the travel retail business of Folli Follie Group.
The business, trading under the Hellenic Duty Free Shops banner, is the leading travel retailer in Greece with 111 shops, more than 18,000sq m of retail space and an attractive concession portfolio with long duration. In 2011, it generated turnover of €291 million, of which more than 80% came from international customers, an important consideration given Greece’s current economic woes (see Comment below).
EBITDA in 2011 was €84 million, with an EBITDA margin of 29.0%. “The acquisition is consistent with Dufry’s growth strategy focused on emerging markets and tourist destinations and will strengthen its position in the Mediterranean region, the world’s biggest tourist destination,” said Dufry.
Folli Follie Group will carve out its travel retail business, which will enter a new local non-recourse bank facility of €335 million. Dufry will acquire a 51% shareholding in the target business for €200.5 million.
The company said it plans to finance the 51% stake, as well as shareholder structuring of €28 million and transaction costs, through an equity increase of approximately €250 million by issuing shares from existing authorised capital. Dufry has the option to acquire the remaining 49% in four years time at fair market value.
Dufry will integrate the business into its existing operations. It said it expects to generate significant synergies through increasing spend per passenger, gross margin improvements and reorganisation of back-office functions. Overall, Dufry estimates annual synergies to reach around €10 million within 18 months of closing.
Dufry CEO Julián Díaz commented: “I am very pleased about the transaction as I believe it represents another big step forward in our strategy to consolidate the fragmented travel retail industry, with focus on tourist destinations and emerging markets, and thus creating substantial value for our shareholders.
“The Mediterranean region, and in particular Greece, is one of the most popular tourist destinations in the world, with currently more than 80% of sales generated with international customers.
“The business is a compelling fit for Dufry’s existing operations in the region. The combination of an attractive and long-term concession portfolio, prime tourist destination and diversified sales channels on the one hand and the potential synergies on the other make the business a very attractive one.
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Folli Follie Group CEO George Koutsolioutsos: “This partnership between Folli Follie Group and Dufry AG is an ideal combination for both groups” |
“Greece is expected to remain an attractive tourist destination, irrespective of the current economic situation of the country, as the business has demonstrated over the past two years. The strong 2011 performance of the business with an EBITDA of €84 million is reflective of this. With more than 80% of sales generated with international customers, this is de facto an international business located in Greece.
“We are also very pleased to retain Folli Follie Group as our business partner going forward. The combination of Folli Follie’s local expertise and Dufry’s global reach will generate significant results for both companies, their clients, landlords, suppliers and other stakeholders.
“I would also like to welcome the management team and the 1,910 employees joining Dufry in this transaction. As a global group, Dufry will offer attractive perspectives and development opportunities to the new team.”
Folli Follie Group CEO George Koutsolioutsos stated: “This partnership between Folli Follie Group and Dufry AG is an ideal combination for both groups. This alliance, occurring at a time of strong revenue and profitability growth of our travel retail activity, will reinforce the growth of this business and realise noteworthy synergies, in particular in the areas of purchasing and distribution.
“Through our partnership with Dufry AG, we have gained a strong partner who will transform the leading local travel retailer into an international business through its international presence. This agreement will have an important impact by improving our Group’s financial position significantly.
“This partnership is a proof of confidence for the entrepreneurial environment in Greece and supports our country’s efforts in attracting new international investments. This new business agreement not only secures the existing employment positions but will also create additional employment position through international expansion.”
COMMENT: This deal ticks all the boxes that Julián Díaz seeks in an acquisition. And the timing couldn’t be better.
The company is profitable, exceedingly so in fact (see background below), enjoys long-term, exclusive contracts (in 1998 it bought the rights from the state to manage and operate the country’s duty free shops for a 50-year period) and trades largely in high-margin goods. It also offers a diversity of channels, trading in airports, border stations and ports. If you had to mix a Díaz cocktail, this is it.
As the company points out, this is really an international business that happens to be based in Greece, rather than a local enterprise heavily vulnerable to the parlous local economy. The key attractions of the country’s tourism industry – beautiful destinations, beaches, sunshine, history and culture – are ultimately as resilient and perennial as some of Greece’s most magnificent heritage sites.
In 2011, HDFS grew its travel retail revenues by +15.1% to €291 million, a strong performance against the backdrop of the crisis-hit Greek economy. In the first half of this year those sales edged ahead by just +1% to €116 million as passenger traffic slumped -7%. But forget the top line – while first-half gross profits were flat (+0.8%), the margin still reached an impressive 53.3% while EBITDA climbed +5.38% to €35.2 million with the respective margin at 30.3%, up from 29.1% a year earlier.
And the timing? As has been widely reported Dufry faces a major challenge to its hitherto unchallenged supremacy in the Brazilian travel retail market, which generates over a quarter of group sales and around a third of EBITDA. It is a key target for several of the company’s rivals (which have made little secret of the fact) in the wake of the current wave of airport part privatisations and, more importantly, the expiry of many of Dufry’s key airport retail contracts during 2014-2015.
Dufry may well retain most or all of its business there but it will certainly pay heavily for the privilege. From an investment community perspective, therefore, the Hellenic news is the perfect tonic.
FURTHER BACKGROUND
Dufry said that the transaction has highly attractive financial metrics, including:
• Industry-leading EBITDA margins
• Post-synergy EV/EBITDA acquisition multiple of 7.9x
• Transaction is Cash EPS accretive in first full-year (pre-synergies)
Dufry said the transaction further strengthens its position as the leading global travel retailer: On a pro forma basis and based on current exchange rates, Dufry (including Folli Follie’s travel retail business), generated a combined turnover of approximately CHF3,388 million and EBITDA of approximately CHF553 million, based on the year ended 30 June.
The company described Hellenic as a “pure travel retailer in a major tourist destination”.
Folli Follie Group’s travel retail business is the overwhelmingly dominant player in Greece with the rights to run its contracts till 2048 – almost unheard of duration in our industry.
As a popular tourist destination in the Mediterranean, the tourism industry in Greece has proven to be highly resilient during a difficult period for the local economy. In 2011, the number of international tourists in the country increased by 9% and Greece received more than 16 million tourists, among which Germans and British were the most important visitors. The prospects for the future are also positive with the number of international tourist arrivals expected to grow by +4.5% per year.
The target business fits well into Dufry’s operations, the company said. Currently present in several locations in Southern Europe and Northern Africa, Dufry will operate the business through its Region EMEA & Asia. Dufry foresees substantial synergies through the operational integration of the business and also improvements in the existing operations in the region.
The target business will be refinanced through a new credit facility of €335 million. That facility is agreed with a syndicate of local banks and will be structured as a committed five-year amortizing term loan. The credit facility is structured as non-recourse debt secured only through pledging of 100% of shares of the target business.
In addition, Dufry has refinanced its existing revolving credit facility of CHF415 million, which is due to expire in 2013, and has structured a new committed five-year facility of CHF650 million with a syndicate of banks. The facility will be used for general corporate purposes and will have the same covenants as the existing Group credit facilities.
For the refinancing of the remaining term loans expiring in 2013 of approximately CHF502 million, Dufry is considering accessing the debt capital markets. In this context, Dufry is seeking corporate credit ratings from rating agencies. Such ratings will be confirmed shortly and are expected to be in the BB area, the company said.
Next steps
Folli Follie Group will immediately start the carve out of its travel retail business, which involves a series of legal steps and requires various approvals. The transaction is expected to close after completion of this process and obtaining all relevant approvals, including governmental consents and the approval of Folli Follie Group shareholders, which based on current information is expected to be early next year.
Dufry plans to execute the equity increase using existing authorised capital.
