TLDR (Too Long Didn’t Read Summary)
Massive liquidity at French furniture firm BUT suggests to us strategic M&A or a large dividend are on the horizon
BUT shareholder Andreas Seifert’s history with Steinhoff may hinder potential Conforama transaction
We note the bonds are callable in Nov-19, but we see little sense in taking out the Notes given current flexibility of the cap structure (callable in IPO, portable, already huge RP capacity)
Notes are portable, both at current leverage and even pro-forma for a potential dividend of up to all of the company’s cash on balance sheet (€234m)
Owners could take out all their initial Equity today, IRR currently @ 28%
Background
French furniture company BUT was acquired by Clayton Dubilier & Rice & WM Holding in 2016. WM Holding is owned by Dr. Andreas Seifert, a member of the founding family and the Chief Operating Officer of XXXLutz KG. XXXLutz is Austria’s largest furniture provider and one of the largest manufacturers of furniture in Europe.
Since LBO performance at BUT has been reasonably good with EBITDA marginally higher vs. issuance ( €107.7m, €103.4m). The company has also seen strong cash generation, with a significant portion of this due to the renewal of the company’s consumer credit agreement with BNP Paribas (10 years, €50m commission advance). As a result net leverage is now 1.6x vs. 3.6x at issue.
Dividend out the cash & exit?
We note the company has a massive €234m of cash on balance sheet plus a €100m undrawn RCF - hardly capital efficient. Under the Notes, we believe there is ~ €317m of restricted payments capacity which could allow the Shareholders to pay a significant dividend. In theory it’s possible they have already done so (FY19 report is not due until later this month), however, on its last earnings call management said it did not anticipate a “dividend or any significant change in our financial structure, for the time being". March is also the seasonal cash high point for the company.
In any case, this looks like quite a rosy picture for the Owners. They acquired the business in 2016 for €540m with a €200m equity cheque (5.2x EV/EBITDA excl. fees). Any dividend could recoup all of their initial investment and more, while any sale at a flat EV multiple suggests a 28% IRR. So far we've seen no press suggesting a sales process or IPO are underway.
Especially interesting is the fact that the capital structure is portable. With this set at 3.75x, the Owners could dividend out all their initial investment and still sell the business to a new sponsor without refinancing the Notes. With 5 years still to maturity this could be an attractive option for a potential buyer (no debt underwriting fees).
Refinancing / Recap
The Notes hit first call in Nov-19. The company would need to save ~1.4% on its cost of debt to justify the call premium on a 2 year breakeven basis. The Notes pay 5.5% and current trading levels suggest low 4s for a new deal may be tight (YTW: 2.7%, YTM: 4.8%). An FRN or loan refi may also prove difficult given Moody’s rates the current Notes B3. None of the recent ratings commentary suggests an upgrade is likely.
Of course, the company could also come to market with a more aggressive dividend recap rather than a straight refi, but we see little upside to this. There’s already: 1) cash available to dividend 2) huge RP capacity and 3) a new deal would also reset the call period limiting sponsor exit optionality (increased prepayment cost in case of IPO or Sale). With the current portable structure and 5 years to maturity we don’t see much reason to refinance unless the Owners intend to hold the business much longer term or engage in significant M&A.
A partial call of the bonds is also possible, it would certainly be a much better use of cash from a cost of capital perspective, but is that really likely when a PE firm is involved...
The bigger picture / strategic M&A / equity partner buyout?
The significant cash build up & 50/50 ownership with a strategic like XXXLutz also got us thinking about M&A. Interestingly Steinhoff-owned Conforama is the second largest furniture player in France with a 16.1% market share (IKEA #1 at 19.4%, BUT #3 at 13.4%). After its accounting scandal & growing debt pile Steinhoff is rumoured to be divesting Conforama after declining sales & job cuts earlier this year.
Indeed, in Apr-19 Conforama went through a restructuring where it received a €316m new money financing. The Group’s financial performance has sharply deteriorated with EBITDA collapsing from €142m at Dec-17 to €54m in Dec-18 according to a recent Lender Presentation.
Combining the #2 & #3 players would make 'BUT-Conforama' the largest furniture player in France by some margin. We note that when asked directly on the Q3’19 earnings call, “Are you interested in Conforama?” Management replied “We will not comment too much on that” and refused to be drawn any further on follow ups...
A link to Steinhoff?
What makes the Conforama situation even more intriguing is the past dealing of Steinhoff with BUT shareholder Dr. Andreas Seifert (COO of XXXLutz, indirect shareholder of BUT via WM Holding).
In 2011, Steinhoff and Seifert formed a strategic partnership to buy Conforama. However, Seifert allegedly failed to come up with his 50% of the purchase price due to ‘cashflow issues’, It has been reported that Steinhoff’s CEO Markus Juste facilitated his participation via a convertible loan note but in an amount less than the original 50%.
A subsequent failure to stump up the cash for the acquisition of Kika/Leiner in 2013 led to Juste and Seifert terminating their business relations. This is turn led to litigation and Seifert reporting financial irregularities at Steinhoff to German authorities.
See below the disclosure of Conforama legals wranglings in the original BUT OM.
Historic bad blood between Steinhoff and Seifert may not be terminal to any BUT deal. The two parties have been able to conclude more amicable business transactions in the recent past. In 2018, Steinhoff sold half of German furniture chain POCO to Andreas Seifert, supposedly "ending" the bitter dispute between the two.
Antitrust approval for any ‘BUT-Conforama’ deal could be another issue. Market share rather than continued XXXLutz ownership is most likely to be the hurdle. We note the EU previously waved through the original BUT acquisition emphasising the lack of geographical overlap between the French company and XXXLutz.
In any event, CD&R could always offer to buy out part of XXXLutz’s interest to help ease any concerns. Indeed, a buyout of one equity partner could be the intended proceeds for some of the cash build up on balance sheet. Alternatively perhaps there may be differences of opinion in strategic direction / financial policy between the owners…
Q4’19 results are due on 23rd September… we’ll be eagerly waiting.
Notes
Restricted Payments Capacity
- CNI: €20m Salted + 50% CNI (€17.6m = (-14.2 + 32.9 + 16.5) * 50%)
- Capital Stock: €22m
- General Basket: €50m / 5% Total Assets (~€70m)
- Unrestricted Subsidiaries: €25m / 2.5% Total Assets (~€35m)
- Unlimited: 3x Net Total Leverage (€152m)
Estimated RP Capacity: ~€317m
Key metrics (Mar-19)
Total Assets: €1,394m
LTM EBITDA: €107.7m
