Autogrill stockholders were less pleased with the offer however, perhaps expecting a premium over the undisturbed share price that did not materialise. Dufry’s fortification of its market position and balance sheet comes at a crucial time as the travel industry braces against strong macro headwinds amid recessionary fears.

A free lunch?

The transaction is structured in two stages:

• Stage 1: Edizione will exchange its 50.3% stake in Autogrill in return for ~20-25% stake in Dufry via mandatory convertible notes, with an exchange ratio of 0.158 for new Dufry shares
• Stage 2: A Mandatory Tender Offer (MTO) for the remaining 49.7% of Autogrill shares. Autogrill shareholders can either (i) exchange at the same ratio as Edizione, or (ii) take a cash alternative of €6.33 per share

The exchange ratio was agreed with Edizione by reference to the 3-month VWAP of Dufry and Edizione shares prior to 14 April 2022, equal to €6.33 (Autogrill) and €39.71 (Dufry). This means Dufry will pay no premium over the ‘undisturbed’ Autogrill share price. Interestingly, as far as we can see, the original share price ‘disturbance’ on April 14th seems to have come not from news of the Dufry takeover, but from news of Edizione and Blackstone preparing for a takeover of Atlantia (the Italian infrastructure group) which Autogrill stockholders may have seen as an opportunity for additional synergies — particularly in comparison to Global Infrastructure Partners and Brookfield’s reported bid to break Atlantia up and hand the concessions business to Spanish tycoon Florentino Perez.

Subject to regulatory approval, Stage 1 is expected to close around Q1 2023, followed by the MTO, with completion of the settlement expected by Q2 2023. As reported, the merger shouldn’t trigger a CoC at Dufry, though it may at Autogrill.

Stage 1 will be deleveraging for Dufry, with the consolidation of Autogrill bringing pro-forma net leverage (uses Adjusted Operating Cash Flow) for the group down by ~0.8x. Stage 2 will require cash consideration of up to €1.2bn (49.7% free float of ~385m ordinary shares), depending on the number of Autogrill shareholders who accept the €6.33 / share cash offer, rather than exchanging into Dufry shares. Management suggests this will be mostly refinanced with cash/debt, although a portion is likely to also come via a rights issue or similar equity raise.

At FY 2021, when excluding lease receivables and liabilities Autogrill had net debt of €197.4m. If we imply the entire equity value at the cash consideration price of €6.33 per share, this suggests an EV/EBITDA multiple of ~5.0x on Underlying EBITDA of €529.9m.

Investors on the Autogrill call were concerned about the valuation, suggesting the cash price and exchange ratio was “well below what many of us expected”. Management responded that it was Dufry and Edizione who had to answer to this, but the €6.33/ share cash alternative was “just the floor”, and that they didn’t know whether this price might rise – “I don’t have a crystal [ball]”. However, Dufry makes it clear in their PR for the deal, neither the exchange ratio or cash alternative will be subject to any adjustment.

Autogrill shares fell ~7.5% on Monday after weekend news of the deal, slumping to the €6.33 cash offer level at time of writing.

Dufry diversifies

Dufry’s sales pitch was clear – more diversification, less leverage, and synergies to increase profitability. The combined group had pre pandemic (2019) sales of CHF13bn (~€13.2bn) and EBITDA of ~CHF 1.4bn (~€1.42bn).

Autogrill will add to diversification both through a significant increase in exposure to the Food & Beverage segment, but also geographically, with a greater presence in North America, and targeting the fast growing China and APAC regions. The reliance on the airport segment will also be slightly reduced:

Turning to the financials, Dufry presents stand-alone ‘leverage’ of 3.2x, based on CHF 3,080m net debt as of FY 2021, and a pre-Covid FY 2019 Adjusted Operating CF of CHF 960m. Pro forma for the Edizione stake transfer (but pre-MTO) this is expected to decrease to 2.4x, but is likely to increase with the financing for the cash consideration of the MTO, discussed above. The combined group has a leverage target of <3x between 2024-2025, depending on transaction timelines. However, using the stated group FY 2021 EBITDA of CHF 595m (pre Autogrill disposals), leverage comes to ~5.5x.

Operationally, the transaction is expected to bring CHF 85m of total annual synergies within two years post-completion, to be reflected at the EBITDA level (around ~CHF 60m in EFCF, after tax and minority interest costs). These cost savings will predominantly be found in the US – where the group’s operations have the greatest overlap – helpfully assessed and confirmed by McKinsey. But, some chunky one-off integration costs and one-off transaction costs of CHF 100m each during the first two years will hamper any immediate cash benefits.

Dufry also sees cross-selling opportunities by rolling in Food & Beverage into its predominantly retail operations. Current passenger conversion (people who stop and buy something in travel retail) is around 15-20%, but much higher in F&B (~30%). Combining these two formats is key to the new hybrid model, where management hopes to gather cross-selling opportunities, for example selling duty free whiskey next to a bar serving the same liquor.

Elsewhere, much was made of a push to redefine the firm's approach, from travel retail to travel experience. Moving from separate offerings across retail, convenience and food & beverage to a more holistic offering – focusing on the consumer in order to increase conversion rates. Participants on the presentation were treated to a 90 second montage of swish store formats and uplifting slogans – nicely backed by Moby’s 2005 hit “Lift Me Up”.

Turbulence ahead?

Despite this energetic marketing around travel experiences, a cause for concern is how many people are, and will be, traveling in the first place. This week’s Autogrill investor call was marked with questions surrounding core KPIs and the group’s down market resilience, with investors wary of strong macro headwinds.

Although management projects that motorway traffic will remain strong despite increased fuel prices, bottlenecks in the crucial airport segment (some 80% of group revenue, based on 2019 figures) continue to be a problem with airlines and airports having so far failed to rehire adequate personnel to deal with the demand recovery. With a recession looming, failure to take advantage of the recovery period before discretionary spend falls off may prove costly, with management acknowledging an Autumn slowdown may be on the horizon.

Furthermore, although passenger levels have of course rebounded since 2020, management’s (and the wider industry’s) notion of a “revenge travel” environment is perhaps a little overblown. Even in the quickly rebounding US market, passenger levels have only reached ~72% of 2019 levels, far above the world average of a ~45% recovery.

Bearing this in mind, Autogrill’s lighter debt load and any diversification benefits the company can bring offer vital bear market fortification for Dufry.