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INTERNATIONAL. Dufry has explained the thinking behind its US$957 million investment spree announced earlier today, involving four separate acquisitions in key emerging markets.
In an address to analysts this afternoon (click on icon to download the presentation) the company underlined the value-enhancing nature of the deals, individually and collectively.
As reported, these include Argentina’s leading travel retailer InterBaires for US$285 million.
Besides InterBaires, the leading airport retailer in Argentina, the deals included airport retail operations in Uruguay, Ecuador, Armenia (all businesses related to tycoon Eduardo Eurnekian) and Martinique, plus wholesale platform IOSC.
The company noted that the acquisitions had the following attractions:
Emerging Market locations with high growth potential: Complementary to operations in South and Central America and Eurasia
Highly profitable operations: Pro-Forma EBITDA margin well above 20% when combining Travel Retail + Logistics businesses
Quality and long-term concession portfolio: More than 90% of sales based on contracts with remaining life of more than 10 years
Material synergies available: Top-line, purchasing, logistics and back office
Consolidation of local operators: Dufry’s global market share increases by 1 percentage point to 8%
Dufry CEO Julián Díaz said this afternoon: “The companies we have acquired represent an important target not only because of their size or the quality of the assets, but because they fit well with our business model. They are airport retail businesses, duty free specifically and they are located in emerging markets.
“People ask me whether this is the right time to acquire? But acquisitions don’t just happen when the time is right or when you want them to, they are opportunistic. We began the approach for several of these companies as many as three years ago, but now the time has come where can conclude these acquisitions.
“When we acquired Hudson Group in 2008, the situation was similar, and the market was not stable. But for us, the strategy is the same now as it was then.
“First, we’re acquiring companies in high emerging markets with growth potential. We’re also acquiring leaders in each market [among the retailers], and with the distribution company in Uruguay, one of the most efficient companies I have ever seen in my professional life.
“With this acquisition, 60% of Dufry sales and 63% of EBITDA will be generated in emerging markets, and 43% of the theoretical customers of these combined businesses will be Brazilians, so that is very important.”
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The new businesses bring a high-quality concession portfolio, as well as generating value creation for shareholders due to the high growth potential, the company said.
Profitability was a key factor behind the purchases, Díaz added: “The companies carry a combined EBITDA margin of 24%, mainly due to the fact that they are pure duty free operations at airports, and duty free represents the highest possible margin across all of our operations, which combine duty free and duty paid, across many platforms.
“There is also the quality of the portfolio. 96% of the contracts have a remaining life of over ten years. They also carry concession fees that are 13.2% of turnover, plus there are no Minimum Annual Guarantees. That means these are very competitive and efficient. We also do not expect that the concession fee rates will change over the lifetime of the contracts.”
He added later: “It’s important to also note that the concessions in these new companies are exclusive agreements. So if new commercial opportunities arise at the airports, we will be operating them.”
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The revenues of the combined companies amount to US$395 million (based on 12-month sales to the end of May), with EBITDA at US$96.5 million.
Díaz said he expected synergies of US$25 million to be generated over the next two years of integration, combining turnover growth, gross profit improvements and cost reductions. The new companies are also expected to produce +8% organic sales growth per year combined.
“The most important element is purchasing power,” Díaz noted. “Currently Dufry can bring a purchasing power to negotiations measured at CHF1.2 billion; this will bring our purchasing power to CHF1.5 billion.”
He added: “Why is consolidation important? It delivers not only volume but also exposure. Before this transaction we operated in 143 airports; this brings the number to 153. If you can operate at São Paulo, Buenos Aires, Puerto Rico and Mexico City, as well as in the Dominican Republic and Aruba, you have significant powers of negotiation and can improve your gross margin.”
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Turnover at the combined new-look Dufry (based on pro forma 2010 figures from the new acquisitions) reaches close to CHF3 billion (from CHF2.6 billion), up by +14%.
And there is substantial room to grow, added Díaz, partly because international passenger traffic at the key airports where the new companies operate is growing ahead of the global average.
The combined group will operate 167,866sq m of retail space (based on 2010 pro forma figures from the acquisitions), compared to 154,366sq m previously. Of the new space, 57% will come through InterBaires’ operations.
Díaz said: “We will operate Arrivals as well as Departures shops in Argentina, Uruguay and Armenia. It’s a business we know well from our experience in Brazil.”
The new acquisitions bring with them a portfolio that largely mirrors Dufry’s weighted by key product category, with fragrances & cosmetics a key sector. As the company noted, beauty has been the fastest growing category across its network from 2003 to 2010, with over +25% compound annual growth.
The company, through CFO Xavier Rossinyol, also offered an intriguing insight into its rationale for the purchases, based on the multiples paid for these and other travel retail acquisitions in recent years.
Dufry said it paid ten times EBITDA (based on EBITDA at the acquired companies over the past 12 months) in this transaction, noting that it was highly attractive given the exclusivity and long terms of the contract, plus the fact that they were profitable and duty free.
This mirrored Dufry’s acquisition of Dufry South America in January 2010, it said, and was more favourable (based on the same terms) than Autogrill’s acquisition of World Duty Free, Folli Follie’s acquisition of Hellenic Duty Free Shops and also of its own acquisition of Brasif and Eurotrade in 2005 [see chart at bottom of this page].
The company said its focus in the next 12 months will be on cash generation and balance sheet management.
“The acquisitions further strengthen Dufry’s position as a leading global travel retailer,” it noted.
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