Dufry announced this evening that it’s officially merging with Autogrill, something that was widely expected since mid-April when the deal was first reported in the media. While they’re calling it a merger, let’s face it…this is an acquisition. The Benneton family (Edizione -- majority owner of Autogrill) will get three seats on the Board, but aside from that, this is DUFRY management running the show. We’ve been fans of the deal since initially speculated, with the one unknown being the price, or the percent ownership – but the ratio is right in line with what we thought/think is acceptable (see deal details below). The scale of the combined entity can’t be ignored. $13.5bn in sales in 2019, 5500 stores, including 350 airports, 2.3bn in passengers in over 75 countries and 60,000 employees. Diversified travel retail exposure operating within a $115bn TAM with combined 2019 sales 39% in Duty Free, 26% Duty Paid and 35% F&B with geographic diversification of 43% Europe, 32% North America, and 25% in the rest of the world (plus the China Hainan JV with Alibaba).
Our bullish thesis around DUFRY is predicated on pent-up demand in global travel being realized over the next 1-3 years, on top of a leaner cost structure, which should bring DUFRY stand-alone up to 11-12% margins (vs 7-8% pre-pandemic). That is clearly playing out, as the company also reported that sales sequentially improved vs 2019 in each month during 2Q and cash flow is on par with 2019. We also think that there has been a structural change in the relationship between the airport operators and the concession holders (Dufry and Autogrill included) that will be more variable in nature and more symbiotic between both parties (in other words – minimum lease payments have been materially lowered which preserves cash flow for the concession holders should the system get shocked again). We also like the massive call option in Hainan beginning in 2023 with the Alibaba JV. On top of that was the opportunity for growth in food and beverage, which is a stated goal for DUFRY to branch out into other key areas of travel retail. This deal with Autogrill fast-tracks that part of the agenda. DUFRY highlighted $85mm in annual synergies, which we think is a lowball as it likely excludes any bargaining power the combined entity gains over airport operators in signing and renewing leases.
The bottom line here is that the core DUFRY thesis is playing out financially, and the Autogrill asset builds a bigger core, addresses and engages the same travel customer in a different way, and ultimately captures a greater share of wallet. The only real risk here as we see it is that DUFRY may need to issue equity to fund the tender for shares that choose not to convert – which will likely take the form of Advent fronting the capital in exchange for more stock. Post transaction about 50% of the company will be held by core long term holders of Edizione, Advent, Qatar, Alibaba, and Richemont. This transaction does nothing to alter our thesis, and if anything gives more avenues to grow the model over a TAIL duration.
We’ll revisit our model including valuation metrics and fair value across durations after the company’s investor presentation. For details on our thesis around DUFRY (including initial thoughts on Autogrill) see our latest Black Book presentation. Link CLICK HERE
Deal Details:
- Share conversion prices: €6.33 per share for Autogrill and €39.71 (CHF 40.96) per share for Dufry or 0.158 Dufry shares for each Autogrill share. Using VWAP price into mid April (14th) shortly before the first news article hit on April 19th from Bloomberg speculating a deal in the works.
- Edizione converting its equity (50.3%) over, other Autogrill shareholders will be given option of the same 0.158 Dufry shares per conversion, or 6.33 EUR per share in cash.
- Dufry expects to refinance any cash consideration in the mandatory tender offer with equity and/or debt instruments. So could be a dilutive event coming as part of the tender payout.
- Expected close in 1H2023
