WH Smith PLC - Proposed acquisition of Marshall Retail Group
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION
THIS ANNOUNCEMENT INCLUDES INSIDE INFORMATION
For Immediate Release
PROPOSED ACQUISITION OF MARSHALL RETAIL GROUP -
· Compelling opportunity to accelerate the growth of
· Fast growing and highly successful US travel retailer with proven business model and unique capabilities across its airport, resorts and tourist retail channels
· MRG's significant recent store awards provide strong and highly visible near-term growth prospects
· The combination with
· The Transaction will broadly double the size of
· Clear integration plan with existing strong MRG management team incentivised to drive growth
· Implied 2019E EBITDA multiple of 10.0x including synergies; 13.7x excluding synergies4
· 2019E EBITDA of c.
· Annual run-rate cost synergies of c.
· 36 awarded stores expected to open between 2020E and 2024E, of which 24 are expected to be opened next year, providing clear visibility into future growth6
· MRG expected to deliver a double-digit sales CAGR from 2020E through to 2024E driven by awarded stores adding more than 75% to retail square footage within airports
· Mid-single digit EPS accretion expected in the first full financial year following Completion, and expected to approach double digit EPS accretion in the second full financial year following Completion
· ROIC expected to exceed WACC by the third full financial year following Completion
FINANCING AND STRUCTURE
· Proposed acquisition to be financed through a combination of new debt and equity
· Disciplined financing structure reflecting
· Remaining consideration to be financed through a new debt facility
· Return to below target leverage of 1.25x expected by the end of
· The Transaction will require shareholder approval, with the Circular convening the General Meeting expected to be published by the end of
· Completion expected in the first quarter of the 2020 calendar year
"We are delighted to announce today the proposed acquisition of
"This is an exciting value creating opportunity, entirely in line with our strategy.
"I would like to take this opportunity to welcome
"I feel very proud to announce that we have reached an agreement with
"This is an incredible milestone for our business and is testament to the outstanding team at MRG. We are proud of our success, particularly our recent growth in airports, and I'm especially excited about the potential this unlocks for MRG in the years to come.
"We very much look forward to working with such an established and successful global business, with strong heritage, as we continue on our journey together to drive both businesses forward."
OVERVIEW OF MRG
MRG is a leading and fast growing independent US travel retailer that is well known to
MRG currently operates 170 stores in
MRG's expertise in large, multi-brand and multi-category store concepts, alongside its differentiated ability to develop localised store concepts that create a strong "sense of place", means that it is well positioned to continue to expand in the growing
Alongside its airport stores, MRG is also a leading player in resorts and tourist locations (primarily in
MRG is expected to deliver revenue of c.
Following Completion, MRG's experienced management team will continue to run MRG from its headquarters in
ACCELERATING THE GROWTH OF WH SMITH'S INTERNATIONAL TRAVEL BUSINESS AND SIGNIFICANTLY ENHANCING SCALE IN THE ATTRACTIVE US TRAVEL RETAIL MARKET
The Directors believe that the acquisition of MRG represents a rare and compelling opportunity to accelerate its expansion in the large and fast growing US travel retail market. The Transaction will meaningfully enhance
The combination of MRG's distinctive retail offering,
ATTRACTIVE FINANCIAL RETURNS
The Transaction is expected to result in strong financial returns given MRG's anticipated growth profile and the incremental value creation from the combination that
ROIC is expected to exceed WACC by the third full year following Completion, and it is anticipated that the Transaction will enhance the Group's growth profile, margins and free cash flow.
FINANCING STRUCTURE IN LINE WITH DISCIPLINED APPROACH TO CASH AND CAPITAL ALLOCATION
The Transaction will be financed through a new
TIMETABLE TO COMPLETION
The size of the Transaction means that it constitutes a class 1 transaction for the purposes of the Listing Rules and accordingly is conditional on the approval of Shareholders at a General Meeting.
A circular containing further details of the Transaction, the Directors' recommendation, the notice of the General Meeting and the Resolution (the "Circular"), is expected to be published by the end of
The completion of the Transaction is subject to a number of customary conditions, including consent from certain store landlords (which may be waived by
An analyst presentation will be held at 60 Victoria Embankment,
The preceding summary should be read in conjunction with the full text of the following announcement and its appendices. The defined terms set out in Appendix II apply to this Announcement.
Media: Nicola Hillman +44 (0) 1793 563 354
Greenhill - Lead Financial Adviser
London: Charles Gournay, Dean Rodrigues +44 (0) 20 7198 7400
New York: Richard Steinman, Samuel Sandford +1 212 389 1500
Barclays - Joint Financial Adviser and Corporate Broker
Mark Astaire, Stuart Jempson +44 (0) 20 7623 2323
J.P. Morgan Cazenove - Sponsor, Joint Financial Adviser and Corporate Broker
Edmund Byers, Behzad Arbabzadah +44 (0) 20 7742 4000
Nicholas Hall, Ed Digby
Brunswick - Public Relations Adviser
Fiona Micallef-Eynaud, Alice Gibb +44 (0) 20 7404 5959
About WH Smith
It has two businesses, Travel and
The Group employs around 14,000 people, primarily in the UK.
This Announcement contains inside information and is issued on behalf of the Group by Ian Houghton, Company Secretary. This Announcement is issued at
This Announcement is not intended to, and does not constitute, or form part of, any offer to sell or issue or any solitication of an offer to purchase, subscribe for, or otherwise acquire, any securities or a solicitation of any vote or approval in any jurisdiction. WH Smith shareholders are advised to read carefully the Circular once it has been published. Any response to the Transaction should be made only on the basis of the information in the Circular to follow.
Apart from the responsibilities and liabilities, if any, which may be imposed on each of the Financial Advisers under FSMA or the regulatory regime established thereunder, the Financial Advisers accept no responsibility whatsoever for the contents of this Announcement, including its accuracy, completeness or verification or for any other statement made or purported to be made by it, or on its behalf, in connection with the Transaction, or any other matter referred to herein. Subject to applicable law, each of the Financial Advisers accordingly disclaims, to the fullest extent permitted by law, all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might otherwise have in respect of this Announcement or any such statement.
The securities of the Group have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act"), or under the securities laws of any state or other jurisdiction of the United States, and may not be offered, sold, pledged or transferred, directly or indirectly, in, into or within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any relevant state or other jurisdiction of the United States. There has been and will be no public offering of the securities of the Group in the United States.
Cautionary statement regarding forward-looking statements
This Announcement may contain "forward-looking statements" with respect to certain of the Group's plans and its current goals and expectations relating to its future financial condition, performance, strategic initiatives, objectives and results. Forward-looking statements sometimes use words such as "aim", "anticipate", "target", "expect", "estimate", "intend", "plan", "goal", "believe", "seek", "may", "could", "outlook" or other words of similar meaning. By their nature, all forward-looking statements involve risk and uncertainty because they are based on numerous assumptions regarding WH Smith’s present and future business strategies, relate to future events and depend on circumstances which are or may be beyond the control of WH Smith and/or MRG and which could cause actual results of trends to differ materially from those made in or suggested by the forward-looking statements in this Announcement, including, but not limited to, domestic and global economic business conditions; market-related risks such as fluctuations in interest rates; the policies and actions of governmental and regulatory authorities; the effect of competition, inflation and deflation; the effect of legislative, fiscal, tax and regulatory developments in the jurisdictions in which WH Smith and MRG and their respective affiliates operate; the effect of volatility in the equity, capital and credit markets on profitability and ability to access capital and credit; a decline in credit ratings of WH Smith and/or MRG; the effect of operational and integration risks; an unexpected decline in sales for WH Smith or MRG; inability to realise anticipated synergies; any limitations of internal financial reporting controls; and the loss of key personnel. Any forward-looking statements made in this Announcement by or on behalf of WH Smith speak only as of the date they are made. Save as required by the Market Abuse Regulation, the Disclosure Guidance and Transparency Rules, the Listing Rules or by law, WH Smith undertakes no obligation to update these forward-looking statements and will not publicly release any revisions it may make to these forward-looking statements that may occur due to any change in its expectations or to reflect events or circumstances after the date of this Announcement.
PROPOSED ACQUISITION OF MARSHALL RETAIL GROUP
2. Background and rationale for the Transaction
Over the past 10 years, WH Smith has made the growth of its Travel business one the Group's core strategic priorities, with the contribution of the Group's Travel business to Group trading profit increasing from c.49% to c.66% in the 10 years between the financial years ended
In 2018, WH Smith successfully expanded into the fast growing US travel retail market through the acquisition of InMotion. The integration of InMotion is now complete and the performance of the business is ahead of WH Smith's initial expectations.
The acquisition of MRG is expected to broadly double the size of WH Smith's
The Directors believe that the Transaction is highly attractive for the following reasons:
Compelling opportunity to accelerate the growth of WH Smith's
The Directors consider the acquisition of MRG to be an important step in growing the international footprint of
Through the acquisition of MRG, the Directors believe WH Smith will be well positioned to compete for new multi-unit tender opportunities across multiple categories in the
Fast growing and highly successful US travel retailer with proven business model and unique capabilities across channels
MRG is a highly successful US travel retailer, with complementary retail channels across airports, resorts and tourist locations. It has a proven business model, with a distinctive retail offering tailored to local consumers in high traffic locations, as well as expertise in large, multi-brand and multi-category stores. Localised formats and brands help to drive a strong "sense of place" and are a key driver of differentiation for landlords. As an example, in a recent multi-brand and multi-category airport tender process, MRG was the standout winner versus other competitors due to their proposed concept, design expertise, and customer service excellence.
MRG has a strong track record of concession wins in US airports, with sales generated through its airport channel expected to increase to c.
Significant recent store awards provide strong and highly visible near-term growth prospects
MRG's store count is expected to grow significantly over the next few years, with 36 awarded stores6 due to open between 2020E and 2024E (of which 24 are scheduled to be opened next year), providing clear visibility into future growth through adding approximately 43,000 sq. ft. of airport retail selling space to its current airport footprint. This represents an increase of more than 75% from its current footprint of approximately 54,000 sq. ft. These awarded stores provide clear visibility into future growth, with WH Smith expecting MRG to deliver double-digit sales CAGR from 2020E through 2024E.
Combination with WH Smith's existing operations will strengthen the Group's
MRG is highly complementary to
The Transaction is expected to result in strong financial returns
The Directors believe that the Transaction is financially attractive for the following reasons:
· MRG is expected to generate total sales of c.
· awarded stores provide clear visibility into future growth, with a 20% increase expected from 2019 to 2020E and double-digit sales CAGR expected from 2020E through 2024E, driven by awarded stores adding more than 75% to retail square footage within airports;
· annual run-rate cost synergies of c.
· additional incremental value creation from combination expected to be derived from anticipated growth opportunities for InMotion stores in MRG locations;
· mid-single digit EPS accretion expected in the first full financial year following Completion, and expected to approach double digit EPS accretion in the second full financial year;
· ROIC expected to exceed WACC by the third full year following Completion;
· the Transaction is expected to enhance Group growth, margins, and free cash flow; and
· the Group intends to finance the Transaction through a disciplined financing structure, reflecting its existing capital allocation policy, with a return to below target leverage of 1.25x expected by the end of WH Smith's first full financial year post-Completion.
WH Smith believes that the Transaction presents an opportunity to deliver annual run-rate pre-tax cost synergies of
WH Smith expects to realise approximately half of these synergies in the first full financial year following Completion, with around 85% of the benefit achieved in the second full financial year following Completion and full pre-tax cost synergies realised in the third full financial year following Completion and thereafter. In order to achieve these synergies, WH Smith expects to incur one-off exceptional operating costs of approximately
Furthermore, WH Smith anticipates benefiting from additional growth opportunities from the opening of new InMotion stores in resort and tourist locations where MRG operates. This opportunity has not been quantified and any potential benefit will be in addition to the announced synergies (
The synergies indicated above are contingent on the Transaction and could not be achieved by WH Smith and MRG operating independently. Both the beneficial elements and relevant costs associated in achieving these synergies are reflected above.
4. Information on
MRG is a leading and fast growing independent US travel retailer that is well known to WH Smith's management team. MRG has complementary retail channels in high traffic airports, resorts and tourist locations. It has a highly successful and proven business model with a strong track record of concession and tender wins. Furthermore, MRG is differentiated from its competitors by its ability to develop distinctive retail experiences tailored to local customers and landlords.
MRG currently operates 170 stores in North America7, with 59 of these inside airports, and generates the majority of its revenue through the sale of news, gifts and convenience products. In the financial year ending
MRG's expertise in large, multi-brand and multi-category store concepts, alongside its differentiated ability to develop localised store concepts that create a strong "sense of place", means that it is well positioned to continue to expand its share of the growing
Alongside its airport stores, MRG is also a leading player in resorts and tourist locations (primarily in
MRG is expected to deliver revenue of c.
MRG's historical financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP"). In its audited US GAAP financial statements for the year ending
In accordance with the Listing Rules, the Circular when published will include full historical financial information on MRG for the last three years, prepared in accordance with International Financial Reporting Standards as adopted by the
i) Income Statement and Balance Sheet Presentation
The presentation of certain income statement and balance sheet financial statement items may be realigned to conform to WH Smith presentation.
ii) IFRS first-time adoption (IFRS 1)
For first-time adopters of IFRS, full retrospective application is subject to certain optional exemptions, designed to reduce the burden where the cost of retrospective application might exceed the benefits. Certain exemptions are applicable and may be applied to the MRG historical financial information under IFRS, including setting the cumulative translation adjustment to zero at the date of IFRS transition; electing not to restate prior business combinations under IFRS; and electing to use a previous valuation of property, plant, and equipment as the deemed cost for IFRS.
iii) Impairment of assets
MRG has recognised long-lived asset and goodwill impairments in historical periods. Differences exist in the impairment models under US GAAP and IFRS that may result in different impairment conclusions and charges in MRG's IFRS financial statements, including differences in how assets are grouped for purposes of the impairment test; the use of a two-step impairment approach under US GAAP whereby the recoverability of assets is tested first using undiscounted cash flows; and the requirement to reverse impairments under IFRS if the assets have recovered in value, which is prohibited under US GAAP.
iv) Share-based payments
Differences can occur between the US GAAP and IFRS treatment of share-based payments, including the option of recognising share-based payment expense over the vesting period using a straight-line method rather than using a graded-vesting schedule as required by IFRS.
v) Income taxes
There are differences that exist between US GAAP and IFRS in the accounting for income taxes, including, but not limited to, the recognition and presentation of deferred taxes, tax bases, deferred taxes on share-based payments and uncertain tax positions.
The forecast sales, EBITDA and EBITDA margin for MRG's financial year ending
5. Integration and Management
MRG has a strong existing management team, led by Michael Wilkins (CEO) and David Charles (President / COO), who have been known to WH Smith's management team for a number of years, and will continue to run the business following Completion. WH Smith has put in place a clear integration plan to facilitate their transition into the Group. MRG management will be incentivised to drive the continued growth of the business, aligned with the objectives of the Group going forward. WH Smith expects to incur one-time costs of approximately
6. Key terms of the Transaction
The total consideration for the MRG Shares is
Under the SPA,
WH Smith has obtained a
WH Smith's sole recourse for MRG's breach of non-fundamental warranties is an indemnity escrow account of
Completion of the Transaction is conditional upon, among others, the satisfaction or waiver of the following conditions (the "Conditions"):
(i) the approval of the Transaction (as a Class 1 transaction under the Listing Rules) by Shareholders (the "Shareholder Approval") passing an ordinary resolution (the "Resolution") at the General Meeting;
(ii) obtaining consent from certain store landlords;
(iii) the expiration or termination of the applicable waiting period under the HSR Act and under any other applicable competition laws; and
(iv) the representations and warranties of
The SPA contains customary termination rights, including upon mutual consent of the parties, by either party for a material breach of the SPA by the other party, by
Under the SPA, WH Smith has agreed to pay a break fee of
7. Capital allocation policy
WH Smith's disciplined approach to cash and capital allocation remains unchanged, and the Group continues to be focused on maintaining a prudent balance sheet, cash generation and value creation for Shareholders. The Transaction is consistent with WH Smith's strategy of allocating capital to growth areas of the business where the Group is able to generate strong returns and enhance shareholder value. Through a combination of ordinary dividends, buybacks and special dividends, WH Smith has returned c.
WH Smith's share buyback programme is being suspended to support near-term deleveraging, with the Group expecting to return to below its target 1.25x net debt/EBITDA leverage ratio by the end of the first full financial year following Completion. WH Smith's progressive dividend policy remains unchanged.
8. Financing the Transaction
WH Smith intends to finance the Transaction from (i) the net proceeds of a placing announced separately today to raise approximately
In addition, WH Smith obtained additional commitments of
The Placing has been underwritten subject to the conditions set out in the Placing and Sponsor's Agreement.
9. Publication of the Circular and General Meeting
The size of the Transaction means that it constitutes a Class 1 transaction for the purposes of the Listing Rules and accordingly is conditional on the approval of the Shareholders at the General Meeting.
The Circular containing further details of the Transaction, the Directors' recommendation, the notice of the General Meeting and the Resolution is expected to be sent to WH Smith shareholders by the end of
1. Purchase price for 100% of
2. Based on GBP:USD foreign exchange rate of £1:
3. US airport travel retail market size excluding Duty Free and Food & Beverages, per AXN Factbook.
4. Acquisition multiple calculated based on purchase price of
5. EBITDA on a fully consolidated basis excluding certain non-recurring items. As is mandatory in some
6. Based on stores awarded to date (33 airport, 3 tourist / resort); awarded stores may be subject to delayed opening.
7. Of which the only location outside of the United States is
8. North American passenger traffic, per ACI World Traffic Forecasts
9. The cost bases for MRG and WH Smith used as the basis for the synergies set out in paragraph 3 of this announcement (Synergies) are those contained in MRG's unaudited management accounts for the 12 months to
10. One-time integration costs of approximately
The definitions set out below apply through this document, unless the context requires otherwise.
£ or GBP
the lawful currency of the UK;
this announcement, made by WH Smith on
compound annual growth rate;
the circular expected to be sent to WH Smith shareholders by the end of
Chief Executive or CEO
Chief Executive Officer;
completion of the Transaction;
the date upon which the Transaction becomes effective;
the conditions of the Transaction as set out in the SPA;
Chief Operating Officer
the Directors of WH Smith;
Disclosure Guidance and Transparency Rules
the disclosure guidance and transparency rules made by the FCA under Part 6 of FSMA;
earnings before interest, tax, depreciation and amortisation;
earnings per share;
Greenhill, J.P. Morgan Cazenove and Barclays;
the general meeting of the Shareholders to be held to consider and, if thought fit, pass the Resolution in connection with the Transaction;
see WH Smith
the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended from time to time;
International Financial Reporting Standards, as adopted by the
J.P. Morgan Cazenove
the listing rules made by the FCA under Section 73A of FSMA;
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Market Abuse Regulation or MAR
Regulation (EU) No 596/2014 of the European Parliament and of the Council of
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the shareholders of
the issued and outstanding common stock of MRG;
the US state of Nevada;
the placing of new ordinary shares in the WH Smith to institutional investors to raise approximately
the total consideration for the MRG Shares pursuant to the SPA, being
the warranty and indemnity insurance obtained by WH Smith in respect of the warranties and indemnities contained in the SPA;
the resolution to be proposed at the General Meeting to approve the Transaction;
return on invested capital;
the approval of the Transaction (as a Class 1 transaction under the Listing Rules) by Shareholders;
the holders of ordinary shares of WH Smith
the Stock Purchase Agreement dated
the proposed acquisition of
United Kingdom of Great Britain and Northern Ireland;
US or United States
United States of America, its territories and possessions, any State of the United States of America and the District of Columbia;
US dollar or USD or $
the lawful currency of the US;
accounting principles generally accepted in the United States;
weighted average cost of capital;
WH Smith or
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