UK. Intense and diverse interest has been reported in the acquisition of BAA travel retail subsidiary World Duty Free, for which first-round bidding closed yesterday.

A number of trade players and venture capital groups are reliably understood to have entered the fray. They may have been joined by a private equity-backed management bid, according to sources. On offer is a business covering seven airports and likely 12-year duty free retail contracts in each.

A shortlist is likely to be chosen by BAA owner Ferrovial soon, with a final decision expected as early as March.

Given the level of interest in the business, a leading analyst in the sector has suggested the risk of a high-priced bidding war is “significant”.

Guillaume Rascoussier, a Financial Analyst for the French brokerage company Oddo, has been covering Autogrill for four years and Dufry for two. His recent note on the World Duty Free (WDF) sale focused mainly on those two trade players but throws up a series of pertinent observations about the sale, ranging from potential synergies to likely valuation.

As a useful background to the sale discussions we present highlights of that note (please note the opinions expressed in this article are not necessarily those of The Moodie Report).

Acquiring World Duty Free will bring the buyer great beauty, liquor & tobacco businesses and margins

The World Duty Free flagship airport – London Heathrow – is one of the biggest duty free businesses in the world, though only the core categories are involved in the sale

Rascoussier introduces the report by noting: “World Duty Free is a rare (and probably expensive) opportunity. The disposal of World Duty Free is a unique opportunity for Autogrill or Dufry to gain immediate critical mass on the travel retail market.

“However, the risk of a bidding war is significant for both suitors, but the high level of potential synergies should ensure substantial value creation. Such an acquisition could act as a catalyst for Autogrill, which has a weak valuation, but appears risky for Dufry. We remain on Buy for the two stocks, but prefer Autogrill.”

Valuation multiples are likely to be high, Rascoussier says – suggesting a price of 13x EBITDA, €600 million Enterprise Value. But he warns: “Due to WDF’s cash cow profile (limited growth outlook in the short term at least), we think it is crucial for the buyer to keep control of the price tag in order to hope for a return on the operation, since there is a risk of a bidding war.”

AUTOGRILL: Rascoussier suggests Autogrill is the favourite to land the business though he adds that the Italian retailing-to-catering company is a low risk to take part in a bidding war.

“The acquisition of WDF would open up other markets to Autogrill and, above all, give it a key competitive advantage in terms of buying power. Even so, there are other acquisition targets in the long term that offer at least as many synergies, which therefore do not make WDF a “˜must have’ for the group.

“We think synergies would be lower than for Dufry, but there should be value creation (extra value of €0.8 per share) and the dilutive impact should be very low (-3% in year 1) initially.

“Financial multiples should remain stable (net debt at around 3x EBITDA) and the group’s balance sheet should be definitively optimised in the medium term. Such an acquisition could act as a catalyst for Autogrill, which has a low valuation (cash flow yield forecast for 2008 = 6.8%).”

Also see “˜Aldeasa v Dufry’ section.

DUFRY: Rascoussier describes Dufry as “a more tempting but more risky operation in our view” noting: “The acquisition of WDF would be an ideal opportunity to balance out the geographical risks in Dufry’s concessions portfolio (very exposed to emerging countries at the moment).”

He continues: “Initial dilution (-11%) is likely to be significantly offset by the potential synergies and value creation that could contribute additional value of CHF8.5 per share.

“However, in order to maintain its financial leeway in the future, it is very likely the group will carry out a capital increase in order to finance such an acquisition which, given the market context and probable exit of its shareholder Advent, makes this operation more risky and less probable in our opinion.

Also see “˜Aldeasa v Dufry’ section.


Rascoussier comments: “WDF is an opportunity to gain immediate critical mass in the duty free segment given the importance of UK airports in the market. And WDF is positioned in a growth segment since, according to the ACI, passenger traffic should rise by +5% annually over the 2006-2025 period in Europe.

“In particular for the London airports, BAA & IATA expect a +2.1-2.4% annual average increase over the next five years to 2013. Note also that according to BAA, the opening of the new Terminal 5 at Heathrow (27 March 2008) should ultimately increase travel retail sales by +5%. We estimate WDF generates sales of over £ 420 million or € 570 million.

“Alpha Airports was purchased in July 2007 at 9.5 times 2007e EBITDA according to our estimates and Aldeasa was acquired in 2005 at the pricey ratio of 10.1 times 2005e EBITDA. We believe that, given the activity’s unique profile, these multiples could be topped and estimate a ratio of 13 times EBITDA assuming no minority interests or provisions and that concession fees do not exceed 32.5% of sales generated, i.e. Enterprise value of £450 million (€604 million).”


Rascoussier notes the familiarity of investment funds with the sector and suggests bids are therefore likely. However, he says in light of potential purchasing synergies an industry acquirer looks probable.

He cites some likely candidates including Autogrill, Dufry, Lagardère/Aelia, Aer Rianta and Lotte but suggests Gebr Heinemann and Nuance lack the funds for such an investment [The Moodie Report thinks it distinctly unlikely that Aer Rianta or Nuance have proceeded with their earlier interest and would add The Falic Group (Duty Free Americas), which declared its interest last week in an interview with us, and possibly Middle Eastern interests to the likely field, as well as the strong possibility of a management bid].


Rascoussier notes: “Various risks exist for an acquisition of this kind: the means of calculating fees paid is a key point given their extent and the possible scissor impact on margins. Nevertheless, the maturity of the UK activity, the explosion that has taken place in low-cost traffic and the ability of WDF to maintain margins despite the duty free restrictions imposed at end-2006 following terrorist attacks in London are reassuring factors.

“But, the separation of concessions (by terminal?), their maturity, the extent of pension funds to be taken on by the acquirer, the segmentation by product of WDF’s sales and potential legal issues with former WDF bond holders remain major uncertainties that still necessitate clarification and these will largely determine WDF’s profitability.”

He continues: “Besides the structuring of the deal, there are also doubts about the future growth of British travel retail: the opening of the new Terminal 5 at Heathrow will significantly dent travel retail sales at the other terminals in 2008-09; openings of new duty free shops at arrivals gates in other countries (Norway, Switzerland etc); the introduction of tax stamps on liquor bottles for domestic UK passengers and the fall in prices of electronic products, will all dent the London business.

“Sales of World Duty Free have increased by a modest +3% a year in the last five years; in particular sales per passenger (all commercial activities included) decreased by -5% between 2004 & 2007 at Heathrow and by -12% at Gatwick between 2001 & 2007. The visibility on the future growth of WDF remains limited: BAA expects mediocre performances with additional declines in revenue per passenger in the years to come (-3% over the next five years at Heathrow despite the opening of the new terminal; -5% at Gatwick).

“But BAA is also very pessimistic about using the bleak future of retail travel revenues as a stick to beat the regulator into raising fees billed to airlines. The Regulation authorities and the airlines have clearly denied these declining trends: the CAA forecasts a +6.5% rise in sales per passenger at Heathrow within five years and +4.5% at Gatwick.

“In a nutshell, despite a short term troubled period during the opening of the new terminal, the growth of WDF should be sustained and significantly leverage margins. However, the lack of visibility makes simulations premature and necessarily imprecise.”


Strategically justified”¦ “Aldeasa has solid positions in Spain and the Middle East and is growing good positions in the US thanks to the backing of HMS,” says Rascoussier. “But, this is a relatively limited base. Establishing strong positions in the UK would immediately boost Autogrill’s travel retail business in terms of size if only in terms of the purchasing power obtained (since main brands need good visibility in London).

“This would make Autogrill more competitive in international calls for tender and therefore allow it to gain precious market share, including gains in the Asian market, a source of significant future market growth and a zone in which the group has limited presence so far.”

“¦But not at any price

While an acquisition of WDF would be justified in strategic terms, it is not a necessity, Rascoussier argues. “Indeed, Autogrill has in the past let seemingly attractive acquisitions go due to excessively high valuations (SSP was bought by an investment fund at around 15 times EBITDA according to our estimates).

“Thanks to the acquisition of Alpha Airports, Autogrill has a foothold in the UK market”¦ giving it a good grasp of the local market and the ability to calibrate its bidding in future calls for tender, though these are limited given the maturity of the UK market. In particular, other acquisition growth opportunities are accessible to Autogrill that would generate as much or even more in terms of synergies (Eliance, Areas, or even Dufry or Nuance).

“The group could be tempted to wait a bit more, and capitalise on falling valuations or a less buoyant cycle in travel retail to acquire one of these companies at a later date. And Autogrill will have to finalise full integration of Aldeasa following the very probable acquisition of the 50% still in the hands of Altadis (being taken over by Imperial Tobacco).”

AUTOGRILL: “˜Our favourite even if Dufry offers more synergies’

Rascoussier says that Autogrill would not generate the most synergies with WDF, noting “We estimate the combined purchases of Aldeasa (100%) and Alpha’s duty free at around €429 million versus €550 million for Dufry.

“Admittedly, most of Autogrill’s purchases are European, whereas those of Dufry are global, which could make Autogrill’s position less unbalanced; but we are convinced that, given Dufry’s past achievements, sector negotiations with brands are largely global. And, we estimate that the potential back-office synergies for Autogrill in a merger between WDF and Alpha Airports would be negligible.

“Furthermore, till Autogrill gets 100% of Aldeasa, its partnership with Altadis will prevent it from generating optimal synergies with WDF, which remains a clear drawback compared to Dufry. Dufry is therefore in theory better positioned in terms of purchasing synergies: we have no benchmark to judge acquisition synergies, but on an arbitrary basis we estimate Autogrill’s potential savings at 4% of WDF’s purchases (versus 5% for Dufry). However, Autogrill has the crucial financial solidity to make major acquisitions in a difficult credit environment, which is less the case for rivals like Dufry.

In principle, a value-creating deal

“Assuming synergies of 4% of WDF’s purchase in 2009 and Enterprise Value of £450m (€ 603m), we estimate a dilutive deal in year one (-3%) mostly due to the disruption caused by the new terminal and a sharp accretive impact thanks to synergies from year two.

“We estimate value creation of €0.8 per share (i.e. additional value of 7% on the current share price) based on top line growth of 4.5% over the next 10 years, a retention rate of 80% in concession renewals in 2020, growth in EBITDA margins (from 8% in 2006 to 9.5% in 2013 after synergies taking into account stable concession fees at 32.5% of sales and fixed charges with salary and administrative charges up by just 2% per annum) and a wacc [weighted average cost of capital -Ed] after tax of 7.3% for Autogrill. The ROCE [return on capital employed] of the operation would exceed the wacc in year two.

“After integration of the acquisition of the 50% stake not yet acquired in Aldeasa with an EV of €1,094million (for 100%, i.e. 10.5 times 2008e EBITDA), the financial leverage is high at 3.2 times 2008e EBITDA. Yet this would be in line with the management’s affirmation that leverage of 3 times would give an optimum balance sheet and manageable debt. Bear in mind that clauses relative to Autogrill’s existing debt stipulated levels of less than 3.5 times, in line with the outlook for integration of Aldeasa and WDF.”

In summary, the move would doubtless be pricey for Autogrill, but profitable and manageable

“We consider the acquisition of WDF by Autogrill manageable if the price combined with synergies remains manageable. At 13 times 2007e EBITDA, the multiple comes to 10.7 times 2010e EBITDA after synergies and full effect of the new terminal; i.e. an undeniably high level (Autogrill is trading at 7.1 times 2007e EBITDA).

“But, the buoyant outlook offered by growth trends in air traffic and the quality of positions in London offer potential value creation, particularly since, in addition to cost synergies, top line synergies (non-quantifiable but probably crucial) would definitively strengthen Autogrill’s competitive position.

“The cash machine represented by its leadership in concession catering in airports could doubtless be extended to its travel retail activity. The dual expertise would therefore be encouraging in terms of value creation for shareholders. Finally, we remain confident in the Autogrill management’s capacity to use caution – as seen in the sale of SSP – and to integrate acquisitions – as it clearly demonstrated in its flawless takeover of HMS.”

DUFRY: an extremely tempting acquisition, but not without risks

Dufry is very exposed to emerging markets that, though growing sharply, are also much more unstable, Rascoussier contends.

He comments: “Europe (the only really mature zone since the group is not present in the US or Japan) accounts for just 16% of EBITDA and this is very much exposed to Italy.

“The acquisition of WDF would therefore be a means of rebalancing Dufry’s risks (with the proportion of mature countries eventually reaching 37% of group EBITDA) and drastically diluting the exposure to the Italian market. In this regard, the acquisition of WDF would be more of a priority for Dufry than for Autogrill.

“Should Autogrill bag yet another acquisition in Europe (after Aldeasa, which Dufry wished to acquire, and Alpha Airports to a lesser extent), this would drastically reduce acquisition growth potential in the OECD for the group, which increases the risk that Dufry may outbid. However, we note the management’s intelligent and moderate approach in recent acquisitions (Puerto Rico; Brazil).”

Dufry would generate optimum synergies

“Thanks to its purchasing power in travel retail and an already privileged position in South America, Dufry would generate optimum synergies via an acquisition of WDF that would be significantly higher than potential synergies for Autogrill.

“We estimate synergies at 5% of WDF’s purchases by year two. The EV/EBITDA acquisition ratio would be 15 initially for 2007 and fall to 10.2 in 2010 after integration of synergies and full effect of the new terminal.

“This is a high multiple – Dufry is trading at 11.9 times EBITDA – but, in line with Autogrill’s acquisition of Aldeasa in 2005, which has less growth potential (notably due to the renewal of concessions in the short term in 2009). The ROCE of the operation would exceed the wacc in year three.

Financing raises questions

“WDF’s size relative to Dufry would generate a high level of debt. The Dufry management admits that a capital increase would probably be required since a 100% debt-financed acquisition may look possible on paper, but would reduce future investment possibilities at a time when the group is well placed to benefit from other small acquisition growth opportunities, notably in Latin America (where value-creation potential is highest).

“We simulated an acquisition 25%-financed by a capital increase involving a non-negligible 15% capital increase at the current price in which the main shareholder (Advent with a 36% stake and which already sold 16% in 2007) could refuse to participate and therefore be diluted.

“This scenario would be likely to create uncertainty for the share and we believe that the Advent shareholder could block a financing package of this sort if, as is probable, valuation levels are high.”

In principle, a value-creating move

“Assuming synergies of around 5% of WDF’s purchases in 2009 and enterprise value of £450 million (€603 million), we obtain a significantly dilutive operation in year 1 (-11%), followed by a sharply accretive impact in year two thanks to synergies.

“The risk is that the capital increase would go ahead at a significant discount to the current share price – which is already weak – and, in this case, the deal would be more dilutive (by 13% in 2008 if the capital increase price is just CHF100).

“We estimate value creation of CHF9 per share (i.e. 7% of the current share price) assuming top line growth of 4.5% for the next ten years, a retention rate of 80% in the concession renewals of 2020, growing EBITDA margins (from 8% in 2006 to 10% by 2013 after synergies and integrating stable concession fees at 32.5% of sales and fixed charges with salary and administrative charges up just 2% per annum) and a wacc after tax of 8.4% for the post-acquisition Dufry.

“Financial leverage would in this case be high at 3.5 times 2008e EBITDA, but in line with management comments that leverage of 4 times is feasible and would generate an optimal balance sheet with very good visibility on the concession’s portfolio.”

In summary, an acquisition of WDF by Dufry seems more risky and less likely

“The outlook for a capital increase in an unfavourable stock-market context and with a shareholder that could be on the way out makes an acquisition of WDF by Dufry a riskier move than for Autogrill, though Dufry is in greater need of the acquisition and would better optimise potential synergies.

“We remain confident that the management and shareholders will be careful to protect the group against the risk of outbidding. However, should Dufry take the plunge – a scenario we do not favour – the deal could create a great deal of value provided the initial capital increase limits shareholder dilution.”


Falic Group targets World Duty Free; “˜We’re very keen and committed’ – Leon Falic – 10/01/08

World Duty Free deadline nears as trade and private equity interest intensifies – 04/01/08

World Duty Free sale is announced – 04/12/07

Putting a value on World Duty Free – 22/11/07

Civil Aviation Authority clears hurdles, sets framework for World Duty Free sale – 20/11/07