INTERNATIONAL. Dufry’s swoop for World Duty Free Group (WDFG) will create a market leader with sales of CHF7.8 billion (US$8.1 billion), the Swiss company said today. Dufry said it expects to deliver annual synergies of €100 million.
As we revealed on Saturday night, Dufry has entered into a binding agreement with the Benetton family’s Edizione holding to acquire its 50.1% stake in WDFG.
[Look out for our ongoing analysis and comment via the acclaimed, constantly updated Moodie Live real-time Blogging service on our home page. We will also publish a special edition of The Moodie Report e-Zine – The Great Travel Retail Consolidation – later this week, covering all aspects of the deal, with reaction and analysis].
 |
“The acquisition of WDF is a truly unique and highly transformational transaction for Dufry and is equally a milestone for the travel retail industry overall. “ |
Julián Díaz CEO Dufry |
On a pro forma combined basis, once fully integrated and including planned synergies, Dufry would have generated a turnover of CHF7.8 billion in 2014 and an EBITDA of more than CHF1 billion. The transaction is expected to be value accretive to Dufry shareholders, resulting in a double-digit cash EPS accretion from the second year post-acquisition.
Following completion of the transaction with Edizione, Dufry will launch a mandatory tender offer for the remaining 49.9% outstanding WDF shares.
Dufry CEO Julián Díaz said this morning: “The acquisition of WDF is a truly unique and highly transformational transaction for Dufry and is equally a milestone for the travel retail industry overall. The transaction further enhances our global position and with a market share of 24% in airport retail, we plan to drive our business to new levels in term of capturing global passenger flows, execution capabilities and efficiencies.
“WDF’s business is highly complementary to our existing footprint and will reinforce our leading position in the Mediterranean, the Americas as well as the Middle East and Asia. At the same time, having access to one of the most diverse passenger flows in Heathrow, combining attractive emerging and developed market customer profiles, will allow us to leverage our existing expertise on all the customer groups and to further develop our global offering.
“As such, the transaction will transform Dufry into an even more distinct global business with a balanced exposure to developed and emerging markets. This acquisition is a continuation of the global geographic diversification strategy which we have communicated and executed for many years, lastly with the acquisition of Nuance last year. We are preparing a detailed integration plan, focused on implementing the operational initiatives previously communicated by WDF and creating additional value through the integration of WDF and Dufry’s existing platforms.
“We have a successful integration track record and will work closely with the local teams. Dufry has great respect for the achievements of WDF and we look forward to working with our more than 9,500 new colleagues in 20 countries and across more than 100 locations. Ultimately what we want to achieve is to develop a better company for our employees, customers, suppliers and landlords and a more valuable asset for our shareholders.”
Strategic rationale
The combined entity will be present in 67 countries, close to 400 locations and reach a market share of around 24% in airport retail globally.
Dufry noted: “The transaction will enhance Dufry’s portfolio with attractive long-term concessions across several major European airports, including the recently extended London Heathrow Airport with a large number of emerging market consumers and the Spanish airports which complement Dufry’s strong Mediterranean footprint; in addition, the transaction will also strengthen Dufry’s operations in North and Latin America, Asia and the Middle East.”
Dufry said that the transaction “will create a series of new growth opportunities thanks to the broader breadth of the combined platform”.
Dufry added: “Combining Dufry’s and WDF’s expertise with different passenger nationalities will provide for an unrivalled proposition in the travel retail industry.”
Financing
AS we reported, Dufry agreed to acquire Edizione’s 50.1% stake in WDF for €10.25 per share in cash, valuing the entire fully diluted share capital of WDF at €2.6 billion (CHF2.7 billion) and implying an enterprise value of €3.6 billion (CHF3.8 billion).
Dufry expects that the transaction will result in cost reductions and gross profit improvements with an annual run-rate of approximately €100 million, which are expected to be fully realised by full-year 2017.
The financing of the transaction has been secured via a fully committed debt bridge facility of €3.6 billion (CHF3.8 billion), of which at least €2.1 billion (CHF2.2 billion) will be refinanced through equity and up to €1.5 billion (CHF1.6 billion) through debt instruments.
Dufry will hold a General Meeting (GM) to approve the equity financing, in form of an at market rights issue, targeting at least CHF2.2 billion from an ordinary capital increase.
The rights issue is fully secured by a combination of the underwriting by a bank consortium as well as commitments by the investors GIC (Singapore’s Sovereign Wealth Fund), the Qatar Investment Authority (QIA) and Temasek, which have all committed to invest up to CHF450 million each in equity in the combined entity.
By way of the capital increase, Dufry expects to maintain its solid financial profile with a net debt / LTM EBITDA not exceeding 4.3x (pre-synergies).
Shareholders representing around 30% of Dufry’s voting share capital have irrevocably committed to vote in favour of the ordinary capital increase.
Following completion of the share purchase from Edizione, which is expected to occur in Q3 2015, Dufry will launch a mandatory tender offer for all remaining shares in accordance with Italian law at the same price per WDF share of €10.25 as will be paid by Dufry to Edizione. The consideration of the mandatory tender offer will be fully payable in cash. Dufry will, following completion of the share purchase agreement, publish an offer prospectus with further details related to the mandatory tender offer.
 |
A new force emerges: Dufry will now control around 24% of the global airport retail market (figures from The Moodie Report’s Top 25 Travel Retailers report, based on 2013 turnover) |
Cost savings
Dufry intends to integrate WDF into its organisation and expects to generate annual cost synergies with a run-rate of around €100 million (pre-tax), comprising both cost reductions and gross profit improvements.
First, Dufry expects to realise cost reductions with a run-rate of approximately € 50-60 million per annum (pre-tax) by integrating the global operations of the enlarged company, including combining and streamlining regional and global headquarters, accelerating the functional optimisation plans in the UK and Spain and streamlining the new operating model.
Secondly, Dufry expects to realise gross profit improvements with a run-rate of €40-50 million through improved purchasing power, optimised pricing and promotion strategies. Dufry expects to fully realise these synergies by full-year 2017 with associated, non-recurring restructuring costs of € 50 million in total during the first two years post completion of the transaction.
New avenues for growth
Dufry said the acquisition presents “additional growth opportunities and revenue synergies”. It noted: “The combined entity is expected to be better positioned to secure new contracts and renew existing agreements. Together, Dufry and WDF expect to benefit from leveraging their mutual core competencies such as scale of procurement operations, assortment expertise and consumer insights and build on long-term relationships with airport operators.
“The combined group’s airport retail capabilities and logistics network is expected to offer a differentiated proposition when competing for concessions and provide a solid foothold to successfully realise renewals and win new contracts in key strategic areas.”
Investment community reaction
On the price, Tyler Tebbs of OliveTree Securities noted this morning: “The offer price is a -6.5% discount to Friday’s close, as speculation that the competitive process which took place (with at least four parties involved), coupled with the trophy asset nature of WDF, could drive valuation well north of €11 per share. The agreed offer price of €10.25 will no doubt come a disappointment for many, especially given comments from the WDF Chairman that higher offers were received.”
He added: “At €10.25 per share, the implied takeout value is 14.82x 2014 EBITDA, and 13.44x 2015 EBITDA (without adjusting for AENA amortization). As shown in a sample set of precedent transactions, valuation is roughly in line with the high end of the range, which perhaps unsurprisingly, was Autogrill’s 2008 purchase of the WDF assets, transacted at 14.5x LTM EBITDA.”
The move will also likely offer a boost in the longer term to Dufry’s share price. Tebbs noted: “Looking through to the pro forma Dufry, a modest 15x earnings (2017), for what will be highly compelling and dominate play in the duty free space (and the only pure play company in the listed space), would imply Dufry is a CHF164 stock, +20% above current levels. We would not rule the potential for further re-rating as well as potential to overachieve on synergies give the company’s well respected acquisition track record.”
On timing, the analyst noted Dufry’s target of Q3, and added: “At the EC level, the most recent precedent appears to be the 2008 Autogrill purchase of WDF. While we appreciate a Dufry/WDF case brings a new and different dynamic, it is nevertheless worth highlighting the commission’s findings on the nature of the industry which would imply a strong competitive dynamic that likely still exists (new entrants, low switching costs).
“It is possible a large list of jurisdictions may require a filing (HSR, Brazil, EC etc), which could draw out timing, and is the likely rationale behind the language stating that the stake sale “might occur in the third quarter 2015″. While we would not rule out some timing delays around this process, we do not feel that anti-trust will be a material risk to the transaction given the nature of the deal.”
 |
How other previous big travel retail deals were valued; Source: OliveTree Securities |
