Dufry has confirmed that it has signed an agreement to acquire 100% of The Nuance Group for CHF 1.55bn ($1.73bn) –  creating what will easily be the biggest duty free and travel retailer in the world with combined annual sales (based on last year’s separate turnovers) of about $6.3bn (CHF 5,672m).

 

The transaction, described by Dufry CEO Julian Diaz as “transformational” (see his comments below), is expected to close in Q3 2014 and is subject to customary regulatory approvals and other customary closing conditions.

 

Last week TRBusiness understood that a deal was in the offing but neither group was prepared to comment. The confirmation today of the contract – signed on a debt- and cash-free basis – gives Dufry leadership in the airport retail channel with a 15% worldwide market share and a presence in 63 countries (on all five continents), 239 airports and close to 1,750 shops (see maps below).

 

Nuance’s estate consists of 75,000sq m of retail space in 66 locations across 19 countries in Europe, Asia and North America. In 2013, Nuance had a turnover of CHF 2.1bn ($2.34bn) and an adjusted EBITDA [adjusted for Australian concessions] of approximately CHF 156m ($174m).

 

The total purchase consideration of CHF 1.55bn is to be financed with CHF 1bn in equity and CHF 550m in new debt, with potential synergies of CHF 70m at the Nuance level.

 

This latest development follows the 2 April news broken by TRBusiness, where Nuance Group President Roberto Graziani confirmed that the operator was looking at an IPO process valuing Nuance at around $1.4bn – less than the $1.73bn now being paid by Dufry.

 

This latter and more attractive financial alternative effectively underlines ‘mission accomplished’ for European equity firm PAI Partners, which acquired Stefanel’s 50% stake in Nuance back in 2011. Private equity groups are obviously in the business of buying companies, adding value and then selling them on – so this is PAI’s ‘Nuance moment’. Nuance’s other 50% shareholder is GECOS SpA/Gruppo Pam.

 

Commenting on the sale of its stake in Nuance, Raffaele R Vitale (right), Partner at PAI Partners says: “The acquisition by Dufry of Nuance confirms the strategic value of Nuance in the global travel retail industry. As identified at the time of our investment, Nuance has proven to be a pivotal asset in the consolidation of the travel retail sector. During the period of our ownership, we have worked to further consolidate its strong positioning and enhance its appeal for industrial buyers or an IPO.”

 

 

 

NUANCE TO BE INTEGRATED

Dufry says it will integrate Nuance into its organisation and expects to generate cost synergies starting in 2015, with the full run-rate impact of approximately CHF 70m pre-tax synergies per year at the Nuance level being reached by 2016.

 

Dufry also expects to realise an improvement in its gross margin through increased purchasing power and the integration of Nuance’s purchasing into its supply chain and logistics platform.

 

The Switzerland-based operator expects that the combination of the global and regional organisations, as well as global support functions, will also create significant value. The pre-tax integration expenses related to the acquisition are expected to be approximately CHF 20m in 2014 and CHF 10m in 2015.

 

In addition, Dufry says the combination will be beneficial for turnover growth. The retailer has a strong track record in realising synergies through acquisition (see TRBusiness comments below).

 

The retailer believes that through the realisation of synergies, the transaction will “create significant value to shareholders and is expected to be robustly accretive to cash EPS in 2015 and double-digit accretive thereafter”. In terms of valuation, the consideration translates into a 6.9x EV/EBITDA multiple based on EBITDA adjusted for the Australian business and including synergies.

 

A GOOD STRATEGIC FIT?

Following completion of the deal, Dufry will have a much more geographically diversified concession portfolio covering all continents.

 

In 2013, the two businesses had a combined market share of close to 15% in the airport retail industry based on turnover (see below). The geographic presence of Nuance strengthens Dufry’s positions in key markets in the Mediterranean, North and Central Europe, Asia and the US and Canada.

 

 

In the Mediterranean – the largest tourist destination in the world – Nuance’s operations in Turkey, Malta and Portugal complement Dufry’s existing operations there [Dufry has activities in eight countries, such as Italy, Greece, Spain, Morocco and Egypt].

 

In Eastern Europe, Dufry will have a strong market presence in Russia, and add activities in Bulgaria (left), while in North Western Europe, Dufry will become the top travel retailer in Switzerland and add activities in Sweden as well as the UK, most notably at London Heathrow Airport.

 

In Asia, Nuance’s concessions in mainland China, Hong Kong and Macau will be complementary to Dufry’s operations in mainland China, South Korea and Taiwan. In South East Asia, the combined entity will have a presence in Cambodia, Indonesia, Sri Lanka and Nuance will add airport activities in India and Malaysia. Dufry says: “Overall, the combined business is creating an attractive platform for further development in this important region which has been one of Dufry’s key areas of growth.”

 

In North America, the acquisition reinforces Dufry’s position in the US and Canada and is expected to help Dufry to gain further market share in the duty free and duty paid segments.

 

FINANCING

The transaction-related funding is secured through a committed bridge which will be refinanced by equity financing of approximately CHF 1bn and debt capital access to the tune of at least CHF 550m. Furthermore, Dufry is planning to refinance existing debt facilities and extend their maturity profiles. A total package of CHF 4bn has been fully underwritten.

 

As for the equity increase, Dufry intends to do a rights issue and will seek approval for an ordinary capital increase at an Extraordinary General Meeting on 26 June. Dufry intends to use its existing conditional capital authorisation as part of the planned equity financing.

 

Dufry’s reference shareholder group led by Travel Retail Investments, which holds 22.2% of Dufry’s share capital, has irrevocably committed to vote in favour of the capital increase at the EGM and intends to participate in the equity increase pro-rata with its current holding. The definite terms of the capital increase will be determined immediately prior to the EGM. The first trading day of the new registered shares is expected to be on 9 July 2014.

 

‘TRANSFORMATIONAL’ SAYS DUFRY CEO JULIAN DIAZ…

Dufry’s CEO, Julian Diaz (left), says: “The acquisition of The Nuance Group is a transformational deal not only for Dufry but also for the travel retail industry. 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.

 

“Dufry has been a key player in the consolidation of the fragmented travel retail industry and we have been delivering significant value through acquisitions. We have been consistently delivering synergies and diversified our concession portfolio worldwide step by step, thus avoiding concentration risk for any specific region or location. With this transaction, we make another big step forward in this respect and bring our global scope to a new level. Also, the scale and breadth of our business will be changing the scope of the travel retail industry going forward.

 

“The combination of both organisations will further strengthen our current concession portfolio, adding new countries and operations that have a very strong fit with Dufry’s regional strategy. Nuance will reinforce our presence in Asia, Mediterranean, North and Central Europe and North America.

 

“We have identified substantial synergy potential mainly from gross profit margin improvements and cost synergies. Overall, we expect synergies at Nuance level to be generated starting in 2015, with a full impact of CHF 70m starting in the financial year 2016. Additionally, there is further synergy potential of the transaction for Dufry’s existing operations in terms of gross margin improvement and economies of scale in logistics.

 

“We have already prepared an integration plan with the core of this plan being the transition of Nuance’s operations into Dufry’s business model, and we will work closely with the local teams to ensure that we capture the best of the Nuance and Dufry worlds. We look very much forward to working with our more than 5,000 new colleagues in 19 countries to create an even better company.”

 

TRBUSINESS COMMENTS…

The news of the sale comes at the same time that Nuance has been tidying up its portfolio of locations, having reached an agreement only last week to acquire A.S. Watson Group’s 50% stake in the Nuance-Watson joint venture in Asia after a 16-year partnership.

 

In addition to the aforementioned market synergies, there are also numerous others which would make this deal highly attractive and not least that both organisations are based in Switzerland, offering potential multi-million dollar savings once all operations are consolidated.

 

Dufry has a great deal of experience in this area, having acquired many other retailers in the past.[Operations acquired by Dufry between 2006 and 2012 include the following: 2006: Brasif/Eurotrade $500m; 2007: Bared $157m Puerto Rico; 2008: Hudson Group $446m; 2010: Merger of Dufry Ltd with Dufry South America; 2011: Interbaires, Duty Free Uruguay and retail in Armenia, Ecuador and Martinique $957m; 2012: 51% of RegStaer Group, Russia; and also 100% of Folli Follie/Hellenic Group in Greece, €328m].

 

Nuance’s businesses include 46 stores in Asia, with presences in Hong Kong, Singapore, Malaysia (KLIA2), Macau and China. Nuance’s sales in the Asia Pacific region – also a very strategically important target area for Dufry –­ reached CHF.983.1m ($1,095m) in 2013, although this was 26.4% less than in 2012 due to the loss of P&C and GM business [to DFS] at Hong Kong International Airport just over a year ago. Sales this financial year will also be negatively affected by the loss of its P&C contract at Singapore Changi Airport [to Shilla Duty Free].

 

Other key market presences for Nuance include important concessions in Zürich Airport, St Petersburg, Antalya and Stockholm, although Sydney Airport – where a new tender is approaching – has really proved quite difficult. Nuance also did not renew what it describes as its “unprofitable concession in Brisbane airport” where it expects to exit this August. The retailer also has new fashion shops in Mumbai.