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Dufry currently has nearly 1, 400 travel outlets located in major airports of the world. Now it is picking up Nuance, which itself is the world’s 6th largest duty free and travel retail group.
Nuance operates more than 350 duty free and tax free stores, brand boutiques and concept stores. In addition, Nuance also operates an inflight services business and a wholesale and distribution business, supporting the travel retail sector.
Dufry has agreed to pay about US$1.72 billion (Swiss Francs 1.55 billion) for the acquisition, and the combined entity will have a total of 1, 750 outlets once the deal closes. These will be spread amongst 239 airports on five continents and give the enlarged firm a 15% global market share.
Dufry is listed on the Swiss Stock Exchange under the symbol DUFN:VTX, and has a current market capitalisation of about US$5.4 billion, after jumping today more than 6% as the market recited favourably to the announcement. The company is led by its CEO Julián Díaz, who called the transaction a “a transformational deal not only for Dufry but also for the travel retail industry.”
Díaz also added that, “This acquisition is a continuation of the global diversification strategy which we have communicated and executed for many years and that is based on profitable growth through three main pillars: like-for-like growth, new concessions and acquisitions.”
Nuance is presently owned by a group of private equity investors, including European private equity firm PAI Partners, and Gecos Generale Di Commercio E Servizi Spa of Italy, through its Gruppo travel unit. In 2013 Nuance generated a turnover of about US$2.4 billion) (CHF 2.1 billion) and achieved adjusted EBITDA (earnings before deducting interest, taxes, depreciation and amortisation) of about US$175 million (CHF 156 million). Earlier this year there were reports that Nuance was considering an IPO, but now it has turned to the certainty of a sale transaction instead.
As part of an earlier consolidation process in the travel related industry, Dufry merged into it the businesses of the Hudson Group, formerly owned by James Cohen and his father Robert, who passed away in 2012 at the age of 86.
In what turned out to be a preliminary round before the main event, one year earlier, in 2007, a majority stake in Hudson’s retail component had already been sold to giant private equity firm Advent International. When this transaction took place, about US$600 million of the proceeds went directly to James Cohen, who was later sued over it by his niece Samantha Perelman – who is the daughter of financier Ronald Perelman. As of this date the suit has not been successful and remains in litigation, though a similar suit by her father has been dismissed by the courts.
James Cohen today sits on the Board of Directors of Dufry, and according to Dufry’s 2013 Annual Report he is reported as holding 4.88% of Dufry’s shares.
Funding for the Nuance deal is is fully secured through a committed bridge financing, which is then intended to be refinanced by new common equity financing of approximately US$1.1 billion (Swiss Francs 1 billion), which will include some mandatory convertible notes.
Dufry also announced today it was calling an Extraordinary General Meeting of shareholders for June 26th, 2014 to approve a capital increase and, as well, seek approval for a rights offering so that existing shareholders may participate fully if they choose.
Dufry’s reference shareholder group, which holds 22.2% of Dufry’s share capital, including James Cohen’s own holding, has irrevocably committed to vote in favour of the capital increase at the Extraordinary General Meeting and intends to participate in the equity increase pro-rata with its current holding. The reference shareholder group is led by Travel Retail Investments, which is an affiliate of Advent International.
The balance of the purchase price to pay for Nuance will be funded by about US$615 million of additional debt (Swiss Francs 550 million).
To date, Dufry has been a key player in the consolidation of the fragmented travel retail industry, including the earlier absorption of Hudson News itself. Now the Nuance acquisition takes this one step further even.
Dufry also claims to have identified substantial synergy potential in the acquired business, mainly from gross profit margin improvements and cost synergies. Quantifying this, which is always dangerous as it can later be falsified by events, Dufry state they expect such synergies at the Nuance level to be generated starting in 2015, with a full impact of about US$78 million (CHF 70 million) annually thereafter, starting in the financial year 2016. Additionally, the company believes three will be further synergy potential from the transaction within Dufry’s own existing operations, also in terms of gross margin improvement and, as well, economies of scale in logistics. At least Dufry is smart enough to recognise such synergies will take some time to take effect and won’t have immediate impact in 2014.
Again quantifying its views down to the bottom line, Dufry states the transaction is expected to be accretive to cash EPS in 2015, and double-digit accretive thereafter. In terms of valuation of the deal itself, Dufry believes the purchase price translates into a 6.9x EBITDA multiple based on EBITDA adjusted for the (currently loss-making) Australian business – including synergies. A couple of years from now we will find out, when the results are in However the logic of the transaction generally seems extremely sound, and thus far Dufryhas demonstrated it is a very well managed business. The shares have grown about 300% in the last five years reflecting this, too.