USA. WHSmith has entered into a definitive agreement to acquire US speciality travel retailer The Marshall Retail Group from private equity investment firm Brentwood Associates. The deal is valued at US$400 million and was revealed as WHSmith announced its full-year results.
The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close no later than the first quarter of 2020.
UK-headquartered WHSmith is continuing to grow its international travel business, and acquired InMotion, a leading retailer of digital accessories in US airports, earlier this year for US$198 million.
Marshall Retail Group currently operates more than 170 locations across the USA, with 70 at airports.
WHSmith said it expected Marshall Retail Group to deliver a double-digit sales CAGR from 2020 to 2024, and revenue of US$204 million and EBITDA of US$31.5 million for the financial year ending December 2019. The EBITDA figure does not fully reflect contribution from stores opened year-to-date. In its audited financial statements for the year ending 30 December 2018, Marshall Retail Group reported an operating profit of US$15.7 million, and had gross assets of US$250 million, of which US$183 million is related to its balance sheet goodwill and will not transfer to WHSmith.
Marshall Retail Group CEO and President Michael Wilkins will continue to lead the business going forward. He said: “Brentwood has been a great partner over the last five years, having supported the company with growth capital and significant resources to facilitate our infrastructure and store expansion strategy.
“We couldn’t be more excited about our next chapter, aligning forces with WH Smith as we continue to create unique experiences for our guests.”
Incoming WHSmith Group Chief Executive Carl Cowling commented: “Marshall Retail Group is a highly successful US travel retailer with a fast growing airport business. This acquisition will accelerate the growth of our international travel business and combined with InMotion, the market leading digital accessories airport retailer that we acquired last year, will significantly enhance our scale and growth opportunities in the US, a large and fast growing travel retail market. This is an exciting value creating opportunity, entirely in line with our strategy.”
Since Brentwood’s 2014 investment, Marshall Retail Group has increased its presence from eight airports to 15 across North America while also growing its resort business. “[The business] has made impressive progress expanding its presence in the travel retail channel by introducing innovative and thoughtful concepts that resonate with travellers and landlords alike,” said Brentwood Partner Rahul Aggarwal.
“Importantly, the team has also built a best-in-class operational foundation to support continued rapid growth of the company.”
North Point Advisors, LLC and William Blair & Company, LLC acted as financial advisors, and Kirkland & Ellis LLP acted as legal counsel to The Marshall Retail Group in connection with the transaction.
Robust results
Total group revenue at WHSmith in the year to 31 August rose by +11% to £1,397 million with like-for-like (LFL) revenue up +1% compared to last year.
Travel, which generates two-thirds of annual group profit from trading operations, delivered a strong performance. Trading profit in Travel increased by +14% to £117 million of which £20 million related to the international business, including InMotion.
Total revenue in Travel was up +22% compared to last year and up +3% on a LFL basis. Gross margin, excluding InMotion, was up 100bps compared to last year. The retailer opened 19 new units in the UK during the year, taking it to a total of 586 units in the UK.
The International business, including InMotion, won 45 new concessions across Australia, Europe, the Middle East, South East Asia and North America. As of 31 August 2019, WHSmith had 433 units open internationally, against 286 units in 2018.
Analysis: JPMorgan
JPMorgan analysts Alexander Mees and Harry J Gowers said the following of WHSmith’s preliminary FY19 results and acquisition of Marshall Retail Group:
WHSmith has performed strongly in FY19, and started the new year brightly – there are no material changes to our estimates. WHSmith has announced the proposed acquisition of Marshall Retail Group, a US travel retailer, for US$400m, to be funded by debt and an equity placing.
FY19 results are in line with expectations. WHSmith reported adjusted profit before tax of £155 million (US$199 million), up +7% year-on-year in line with our estimate of £155 million. Travel trading profit was up +14% to £117 million (US$150 million) [JPMorgan estimate: £117 million) with High Street flat at £60 million (US$77 million) [JPMorgan estimate: £60 million). Like-for-like sales growth was +1%, including +3% in Travel and +(2)% in High Street. Free cash flow was £109 million (US$140 million), up +14% year-on-year and above our estimate of £96 million (US$123.4 million). The final dividend is up +8% to 41p. In the first 6 weeks of FY20, group like-for-like sales were up +1%, in line with our full year estimate.
Travel performed strongly. Sales in WHSmith’s largest division, Travel, increased by +22% to £817 million (US$1 billion) [JPMorgan estimate £827 million). Like-for-like growth was +3%, as expected. Gross margin, excluding the recently-acquired InMotion, increased by 100 basis points. The rollout of new stores continued apace and Travel ended the year with 1,019 units, up +18%. In the first six weeks of FY20, Travel like-for-likes were up +5%, with WHSmith showing no signs of the weakness in airports recently described by SSP.
Insights from retail analyst Nick Bubb of The Daily Retailer
“Today’s finals are the swan-song for the retiring CEO Steve Clarke, but he is going out with a bang, as the big news is that the group is stepping up its presence in the US with another major acquisition: The Marshall Retail Group is being acquired for US$400m (£312 million) in cash, with half the consideration being financed by a £155 million placing of new shares.
“The multiple is 13.7x EBITDA, but that comes down to only 10x after synergies (with the InMotion business) and the deal will be usefully earnings enhancing. We had never heard of Marshall, but that may be because it operates 170 gift shops under a whole variety of different brand names in casino-resorts and airports, including Flight Stop, Larimer Street Market, Baggallini, Borgata & Co and Ciao.
“WHSmith has also announced that it just won its first US airport locations under its own name. Given the strong results and the exciting acquisition, the share placing should be well absorbed and the share price could even be sparked into life, after a quiet period, by today’s news.”
