TIDMSMWH
RNS Number : 1607Q
WH Smith PLC
17 October 2019
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
WH SMITH PLC
PROPOSED ACQUISITION OF MARSHALL RETAIL GROUP -
ACCELERATING WH SMITH'S EXPANSION IN US TRAVEL RETAIL
17 October 2019
WH Smith PLC ("WH Smith" or the "Group") is pleased to announce
the signing of an agreement to acquire Marshall Retail Group
("MRG"), a leading and fast growing US travel retailer, for $400
million (approximately GBP312 million)(1,2) on a cash and debt-free
basis (the "Transaction").
STRATEGIC highlights
-- Compelling opportunity to accelerate the growth of WH Smith's
International Travel business in the $3.2 billion(3) US airport
travel retail market
-- 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 WH Smith's existing operations,
including InMotion, will strengthen the Group's International
Travel offering
-- The Transaction will broadly double the size of WH Smith's International Travel business
-- Clear integration plan with existing strong MRG management
team incentivised to drive growth
FINANCIAL highlights
-- Implied 2019E EBITDA multiple of 10.0x including synergies; 13.7x excluding synergies(4)
-- 2019E EBITDA of c.$31.5 million(5) , which does not fully
reflect contribution from stores opened year-to-date
-- Annual run-rate cost synergies of c.$11 million expected by
the third full year following Completion from procurement savings
and operational efficiencies
-- 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 growth(6)
-- 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 WH Smith's capital allocation policy
-- Approximately GBP155 million to be raised through an underwritten equity placing
-- Remaining consideration to be financed through a new debt facility
-- Return to below target leverage of 1.25x expected by the end
of WH Smith's first full financial year following Completion
-- The Transaction will require shareholder approval, with the
Circular convening the General Meeting expected to be published by
the end of November 2019
-- Completion expected in the first quarter of the 2020 calendar year
Carl Cowling, WH Smith Group Chief Executive effective 1
November 2019, commented:
"We are delighted to announce today the proposed acquisition of
Marshall Retail Group. MRG is a highly successful US travel
retailer with a fast growing airport business. This acquisition
will accelerate the growth of our International Travel business and
combined with InMotion, the market leading digital accessories
airport retailer that we acquired last year, will significantly
enhance our scale and growth opportunities in the US, a large and
fast growing travel retail market.
"This is an exciting value creating opportunity, entirely in
line with our strategy.
"I would like to take this opportunity to welcome Michael
Wilkins, CEO, and the entire team across the Marshall Retail Group
to the WH Smith Group and we look forward to working together to
further develop our business across North America."
Michael C. Wilkins, Marshall Retail Group CEO, added:
"I feel very proud to announce that we have reached an agreement
with UK based retailer, WH Smith, to acquire Marshall Retail Group.
WH Smith is one of the world's oldest retailers with close to 1,600
stores across the world.
"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 WH Smith's management team. MRG has
complementary travel retail channels in high traffic airports,
resorts and tourist locations, and has a highly successful and
proven business model with a strong track record of concession and
tender wins. MRG aims to differentiate itself from its competitors
by its ability to develop distinctive retail experiences tailored
to local customers and landlords.
MRG currently operates 170 stores in North America(7) , 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 December 2019, the airports channel is
expected to contribute c.$84 million to MRG's total revenue. MRG's
future growth prospects are underpinned by its highly successful
airport travel retail business, which has a rapidly increasing
footprint. With a further 33 new airport stores expected to open by
the end of 2024 following a series of successful tenders, MRG is
expected to add approximately 43,000 sq. ft. of airport retail
selling space, representing an increase of more than 75% from its
current airport footprint of approximately 54,000 sq. ft. These
awarded stores provide clear visibility into future growth, with WH
Smith expecting MRG to deliver a double-digit sales CAGR from 2020E
through 2024E.
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 US airport
travel retail market. The addition of WH Smith's complementary
expertise in airport essentials and InMotion's market leadership in
tech accessories is expected to further support these growth
prospects.
Alongside its airport stores, MRG is also a leading player in
resorts and tourist locations (primarily in Las Vegas, NV). The
stable and captive nature of customers using these channels means
they share a number of similar characteristics to WH Smith's Travel
business. Resorts and tourism channels are expected to achieve
revenue of c.$68 million and c.$51 million respectively in the
financial year ending December 2019.
MRG is expected to deliver revenue of c.$204 million and EBITDA
of c.$31.5 million(5) for the financial year ending December 2019,
and has demonstrated a track record of delivering store openings
and sales growth whilst maintaining increasing margins.
Following Completion, MRG's experienced management team will
continue to run MRG from its headquarters in Las Vegas, NV, and
will be incentivised to drive continued growth in the business.
ACCELERATING THE GROWTH OF WH SMITH'S INTERNATIONAL TRAVEL
BUSINESS AND SIGNIFICANTLY ENHANCING SCALE IN THE ATTRACTIVE US
TRAVEL RETAIL MARKET
WH Smith's strategic focus on growing its Travel business has
resulted in over a decade of strong and consistent profit growth in
the division, with the Travel business now generating the
significant majority of the Group's trading profit. Within WH
Smith's overall Travel strategy, International Travel has been a
source of sustained growth over the past five years and, 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 Group's continued
focus on this part of its strategy is further supported by its
recently announced tender win that will launch the WH Smith brand
into US airports.
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 WH Smith's scale in the US and the
breadth of its offering to landlords, and will broadly double the
size of WH Smith's International Travel business.
The combination of MRG's distinctive retail offering, WH Smith's
complementary expertise in airport news, books and convenience, and
InMotion's market leadership in tech accessories is expected to
result in a platform that is well placed to drive further growth in
the US. Following the Transaction, the Group will be able to access
all relevant categories in the $3.2 billion US airport travel
retail market(3) , ranging from News & Gift products (such as
news, magazines, books, travel accessories, and food-to-go) to
Specialty products (such as digital accessories, souvenirs, gifts,
apparel, and licensed brand retailing). This enhanced offering is
expected to present substantial future opportunities for WH Smith
to compete in increasingly sophisticated tenders.
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 WH Smith expects to
deliver. Annual run-rate cost synergies of c.$11 million are
expected by the third full year following Completion from
procurement savings and operational efficiencies. Furthermore, WH
Smith anticipates benefiting from additional growth opportunities
from the opening of new InMotion stores in resort and tourist
locations where MRG operates.
WH Smith expects the Transaction to result in mid-single digit
EPS accretion in the first full financial year following
Completion, and to approach double digits EPS accretion in the
second full financial year following Completion.
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
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.GBP1 billion to Shareholders since 2007.
The Transaction will be financed through a new GBP200 million
term loan facility provided by the Group's existing relationship
banks, alongside a c.GBP155 million underwritten equity placing. In
addition, reflecting the increased scale of the Group, the existing
revolving credit facility will be expanded to GBP200 million from
the current GBP140 million.
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.
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 November 2019.
The completion of the Transaction is subject to a number of
customary conditions, including consent from certain store
landlords (which may be waived by WH Smith) and US HSR regulatory
approval. The Transaction is expected to complete in the first
quarter of the 2020 calendar year.
ANALYST PRESENTATION
An analyst presentation will be held at 60 Victoria Embankment,
London, EC4Y 0JP at 09:00am BST today. The slides accompanying the
presentation will be available on WH Smith's website,
www.whsmithplc.co.uk, shortly after the conclusion of the
presentation.
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.
Enquiries:
WH Smith PLC
Investors: Mark Boyle +44 (0) 20 3981 1285
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
WH Smith is listed on the London Stock Exchange (LSE: SMWH) and
is a constituent of the FTSE 250 Index. The Group is a leading
global retailer in news, books and convenience for the world's
travelling customer. With approximately 1,600 stores in locations
across the globe, WH Smith offers customers a wide range of books,
newspapers & magazines, travel accessories, and food &
drink.
It has two businesses, Travel and High Street. The Travel
business operates from 586 units in UK airports, railway stations,
motorway service areas and hospitals, and 433 units outside of the
UK (including InMotion). Travel currently accounts for
approximately two-thirds of Group trading profits. The High Street
business operates from 576 stores, with an extensive reach across
the UK and a presence on nearly every significant UK high street.
High Street sells a wide range of products, across the following
categories: Stationery (including greetings cards), Books, and News
and Impulse (including newspapers, magazines and
confectionery).
The Group employs around 14,000 people, primarily in the UK.
Important notices
This Announcement contains inside information and is issued on
behalf of the Group by Ian Houghton, Company Secretary. This
Announcement is issued at 7.00am BST on 17 October 2019.
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.
Each of Greenhill & Co. International LLP ("Greenhill"),
which is authorised and regulated in the UK by the Financial
Conduct Authority ("FCA"); J.P. Morgan Securities plc (which
conducts its UK investment banking activities as J.P. Morgan
Cazenove ("J.P. Morgan Cazenove")), which is authorised by the
Prudential Regulatory Authority ("PRA") and regulated by the FCA
and the PRA in the UK; and Barclays Bank PLC ("Barclays"), which is
authorised by the PRA and regulated by the FCA and the PRA in the
UK (together, the "Financial Advisers"), are acting exclusively for
WH Smith and no one else in connection with the Transaction and
accordingly will not be responsible to anyone other than WH Smith
for providing the protections afforded to their clients, or for
providing advice in connection with the Transaction, the contents
of this Announcement or any other transaction, arrangement or other
matter referred to in this Announcement as relevant.
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.
WH SMITH PLC
PROPOSED ACQUISITION OF MARSHALL RETAIL GROUP
17 October 2019
1. Introduction
WH Smith PLC ("WH Smith" or the "Group") is pleased to announce
the signing of an agreement to acquire Marshall Retail Group
("MRG"), a leading and fast growing US travel retailer, for $400
million (approximately GBP312 million)(1,2) on a cash and debt-free
basis (the "Transaction").
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 31 August 2009 and 31 August 2019. Since the
opening of its first international store in Copenhagen Airport in
2009, WH Smith has sought to develop its International Travel
business significantly, with International Travel contributing over
17% of the Group's total Travel trading profit in the financial
year ended 31 August 2019.
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 International Travel business, and significantly
enhances the Group's scale and growth opportunities in the
attractive US airport travel retail market.
The Directors believe that the Transaction is highly attractive
for the following reasons:
Compelling opportunity to accelerate the growth of WH Smith's
International Travel business in the United States
The Directors consider the acquisition of MRG to be an important
step in growing the international footprint of WH Smith Travel, and
in significantly accelerating its presence in the United States, a
large and fast growing travel retail market.
The Group's International Travel business is expected to be a
key driver of future growth and value creation for Shareholders, as
demonstrated by its strong performance this financial year, with
revenue up 20% and a record 45 new unit wins in the financial year
ended 31 August 2019. The Group has also announced today a tender
win that will launch the WH Smith brand into US airports.
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 $3.2 billion US
airport travel retail market, which grew at a CAGR of over 5%
between 2013 and 2018(3) . The market is underpinned by continued
long-term passenger growth, with North American passenger traffic
expected to increase from c.1.9 billion in 2017 to c.2.5 billion in
2027E, growing at a CAGR of 2.9%(8) .
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.$84 million for the year ending December 2019,
implying a c.32% CAGR over the last two years. Furthermore, MRG is
a leading player, and benefits from longstanding relationships and
expertise, in high return resort and tourism channels (primarily in
Las Vegas), which benefit from a stable and captive market base.
Similar to WH Smith's Travel business, these markets are
characterised by highly visible stores; consistent footfall;
consistent flow of new customers; "impulse driven" purchases; high
inventory turn; and insulation from e-commerce. Continued growth in
these channels is expected to be supported by a number of long-term
trends, including a growing presence for major sporting events and
conventions in Las Vegas. MRG's attractive business model is
described in more detail in paragraph 4 below (Information on
Marshall Retail Group).
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 stores(6) 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 International Travel offering
MRG is highly complementary to WH Smith International Travel's
existing offering, particularly its leadership in tech accessories
through InMotion and WH Smith's expertise in the news, books and
convenience market, and in space management. Following the
Transaction, the Group will be able to access all relevant
categories in the $3.2 billion US airport travel retail market(3) ,
ranging from News & Gift products (such as news, magazines,
books, travel accessories, and food-to-go) to Specialty products
(such as digital accessories, souvenirs, gifts, apparel, and
licensed brand retailing). This enhanced offering is expected to
present substantial future opportunities for WH Smith to compete in
increasingly sophisticated tenders.
The Transaction is expected to result in strong financial
returns
The $400 million Transaction enterprise value(1) implies a 2019E
EBITDA multiple of 10.0x including synergies; 13.7x excluding
synergies(4) .
The Directors believe that the Transaction is financially
attractive for the following reasons:
-- MRG is expected to generate total sales of c.$204 million in
the financial year ending December 2019, with an EBITDA margin of
greater than 15%, generating an expected EBITDA of c.$31.5
million(5) , which does not fully reflect contribution from stores
opened year-to-date;
-- 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.$11 million expected by
the third full year following Completion from procurement savings
and operational efficiencies;
-- 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.
3. Synergies
WH Smith believes that the Transaction presents an opportunity
to deliver annual run-rate pre-tax cost synergies of $11 million
through procurement savings and operational cost efficiencies(9) .
Approximately 80% of the cost synergies are expected to arise
through procurement savings, to be achieved primarily through the
application of best practices in sourcing and buying as well as
from access to better harmonised terms. The remaining 20% of the
cost synergies are expected to be generated from operational cost
efficiencies.
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 $3
million. This is in addition to incremental capital expenditure of
approximately $1.5 million, primarily relating to IT and digital
equipment.
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 ($11 million).
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 Marshall Retail Group
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 America(7) , 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 December 2019, the airports channel is
expected to contribute c.$84 million to MRG's total revenue. MRG's
future growth prospects are underpinned by its highly successful
airport travel retail business, which has a rapidly increasing
footprint. With a further 33 new airport stores expected to open by
the end of 2024 following a series of successful tenders, MRG is
expected to add approximately 43,000 sq. ft. of airport retail
selling space to its current airport footprint, representing 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 MRG expected by WH Smith to
deliver a double-digit sales CAGR from 2020E through 2024E.
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
US airport travel retail market. The addition of WH Smith's
complementary expertise in airport essentials and InMotion's market
leadership in tech accessories is expected to further support these
growth prospects.
Alongside its airport stores, MRG is also a leading player in
resorts and tourist locations (primarily in Las Vegas, NV). The
stable and captive nature of customers using these channels means
they share a number of similar characteristics to WH Smith's Travel
business. Resorts and tourism channels are expected to achieve
revenue of c.$68 million and c.$51 million respectively in the
financial year ending December 2019.
MRG is expected to deliver revenue of c.$204 million and EBITDA
of c.$31.5 million(5) for the financial year ending December 2019,
and has demonstrated a track record of delivering store openings
and sales growth whilst maintaining increasing margins.
Year ending Year ending Year ending
31 December 30 December 29 December
$ million 2017 2018 2019E
--------------- ------------- ------------- -------------
Sales 163.2 179.1 204.0
EBITDA 23.7 26.8 31.5
EBITDA margin 14.5% 15.0% 15.4%
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 30 December 2018, MRG reported an
operating profit of $15.7 million, and had gross assets of $250
million, of which $183 million related to its balance sheet
goodwill (which will not transfer to WH Smith).
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 European Union
("IFRS"), in a form consistent with the accounting policies adopted
by WH Smith in its own annual consolidated accounts. Such IFRS
financial information may differ from the summary financial
information for MRG set out above as described below. While WH
Smith believes that it has identified what it believes to be the
material differences between WH Smith and MRG accounting policies,
there may be additional differences not noted below.
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 December 2019 is prepared on the basis of MRG's US GAAP
management accounts for the eight months ended 31 August 2019 and
the projected financial performance of MRG for the remaining four
months of 2019.
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 $2-3 million as part of integrating MRG into the
Group(10) .
6. Key terms of the Transaction
On 17 October 2019, WH Smith USA Holdings Inc., a wholly owned
subsidiary of WH Smith ("WH Smith USA"), and MRG Acquisition
Holdings, LLC, a Delaware limited liability company wholly owned by
the MRG Shareholders ("MRG Holdings"), entered into a stock
purchase agreement (the "SPA"), which sets out the terms and
conditions for WH Smith USA to purchase all of the issued and
outstanding common stock of Marshall Retail Group Holding Company,
Inc. (the "MRG Shares"). Upon Completion, WH Smith will,
indirectly, hold all equity interests in MRG.
The total consideration for the MRG Shares is $400 million (the
"Purchase Price"), which is subject to adjustments in relation to
indebtedness, working capital, cash and transaction expenses of
MRG.
Under the SPA, MRG Holdings made customary representations and
warranties to WH Smith and WH Smith USA, and WH Smith and WH Smith
USA made customary representations and warranties to MRG Holdings.
The fundamental title and capacity warranties survive for a period
of six years from the date of Completion (the "Completion Date"),
while all other representations and warranties survive for a period
of 12 months after the Completion Date.
WH Smith has obtained a $40 million warranty and indemnity
insurance (the "R&W Policy") in respect of the warranties and
indemnities contained in SPA, subject to certain specified
limitations agreed with the insurers.
WH Smith's sole recourse for MRG's breach of non-fundamental
warranties is an indemnity escrow account of $1.5 million and the
R&W Policy. For breaches of fundamental warranties, WH Smith's
first source of recovery would be the indemnity escrow account and
the R&W Policy, and once such account has been utilised and
coverage been exhausted, MRG Holdings would be liable for excess
damages up to the Purchase Price. WH Smith also has additional
escrows and indemnities relating to specific items, including a
litigation matter and the delayed opening of certain stores.
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 WH Smith USA and MRG
Holdings being true and correct as at the Completion Date, subject
to certain exemptions based on materiality, material adverse effect
and similar standards.
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 MRG Holdings if WH Smith
does not hold the General Meeting or obtain Shareholder Approval,
or by either party if the Transaction has not closed by 31 March
2020.
Under the SPA, WH Smith has agreed to pay a break fee of $10
million to MRG Holdings if, among others, the General Meeting has
not been convened by 31 January 2020, if the Board of Directors of
WH Smith changes its recommendation that the Shareholders vote in
favour of the Transaction, or the Shareholder Approval has not been
obtained by 31 March 2020.
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.GBP1 billion to shareholders since 2007.
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 GBP155 million before expenses, representing
approximately 7% of WH Smith's existing share capital as at 16
October 2019 (the "Placing"); and (ii) drawings from a new GBP200
million term loan facility (see below).
On 17 October 2019, WH Smith entered into a term credit facility
agreement of up to GBP200 million with, among others, (i) Banco
Santander S.A., London Branch, Barclays Bank PLC, BNP Paribas
Fortis SA/NV and HSBC UK Bank PLC (as mandated lead arrangers and
original lenders) and (ii) Banco Santander S.A., London Branch (as
agent) for, among other things, the financing of the Transaction,
refinancing of any of MRG's existing debt, and the payment of any
related fees and expenses.
In addition, WH Smith obtained additional commitments of GBP60
million under the terms of its existing revolving credit facility
of originally GBP140 million between, among others, (i) WH Smith,
(ii) Barclays Bank PLC, HSBC Bank PLC, Santander UK plc and BNP
Paribas (as mandated lead arrangers and bookrunners and original
lenders) and (iii) Banco Santander S.A., London Branch (as facility
agent).
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 November 2019. Subject to satisfaction of the
Conditions, Completion is expected to occur in the first quarter of
calendar year 2020.
APPIX I
KEY NOTES
1. Purchase price for 100% of Marshall Retail Group Holding
Company, Inc., on a debt-free cash-free basis subject to customary
closing adjustments.
2. Based on GBP:USD foreign exchange rate of GBP1:$1.282, as at 19:00 BST on 16 October 2019.
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
$400 million, divided by expected EBITDA of $31.5 million for the
financial year ending December 2019 less $2.3 million of pre-tax
profit attributable to minority partners (having minority partners
is mandatory under some US airport lease contracts). This amount
will be recognised, on a post-tax basis, as a non-controlling
interest in WH Smith's income statement going forward.
5. EBITDA on a fully consolidated basis excluding certain
non-recurring items. As is mandatory in some US airport lease
contracts (and consistent with InMotion), MRG has minority
partners. The share of post-tax profit attributable to those
minority partners will be recognised as a non-controlling interest
in WH Smith's income statement going forward.
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 Vancouver Airport, Canada.
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 31 August 2019, and WH Smith's preliminary accounts
for the financial year ended 31 August 2019, respectively. The MRG
cost basis has been adjusted for the growth in airport locations
per guaranteed contract wins.
10. One-time integration costs of approximately $2-3 million are
prior to, and separate from, the costs of realising the synergies
set out in paragraph 3 of this announcement (Synergies).
APPIX II
DEFINITIONS
The definitions set out below apply through this document,
unless the context requires otherwise.
GBP or GBP the lawful currency of the UK;
Announcement this announcement, made by WH
Smith on 17 October 2019 in
relation to the Transaction;
Barclays Barclays Bank PLC;
CAGR compound annual growth rate;
Circular the circular expected to be
sent to WH Smith shareholders
by the end of November 2019
containing further details of
the Transaction the Directors'
recommendation, the notice of
the General Meeting and the
Resolution;
Chief Executive or CEO Chief Executive Officer;
Completion completion of the Transaction;
Completion Date the date upon which the Transaction
becomes effective;
Conditions the conditions of the Transaction
as set out in the SPA;
COO Chief Operating Officer
Director(s) the Directors of WH Smith;
Disclosure Guidance and Transparency the disclosure guidance and
Rules transparency rules made by the
FCA under Part 6 of FSMA;
EBITDA earnings before interest, tax,
depreciation and amortisation;
EPS earnings per share;
FCA or Financial Conduct Authority the UK Financial Conduct Authority
or its successor from time to
time;
Financial Advisers Greenhill, J.P. Morgan Cazenove
and Barclays;
FSMA the Financial Services and Markets
Act 2000, as amended, modified
or re-enacted from time to time;
General Meeting the general meeting of the Shareholders
to be held to consider and,
if thought fit, pass the Resolution
in connection with the Transaction;
Greenhill Greenhill & Co. International
LLP;
Group see WH Smith
HSR the United States Hart-Scott-Rodino
Antitrust Improvements Act of
1976, as amended from time to
time;
IFRS International Financial Reporting
Standards, as adopted by the
European Union;
J.P. Morgan Cazenove J.P. Morgan Securities plc (which
conducts its UK investment banking
activities as J.P. Morgan Cazenove);
Listing Rules the listing rules made by the
FCA under Section 73A of FSMA;
London Stock Exchange or LSE the London Stock Exchange plc
or its successor(s);
Market Abuse Regulation or MAR Regulation (EU) No 596/2014
of the European Parliament and
of the Council of 16 April 2014
on market abuse (market abuse
regulation);
Marshall Retail Group or MRG Marshall Retail Group Holding
Company, Inc., a Delaware corporation;
MRG Holdings MRG Acquisition Holdings, LLC.,
a Delaware limited liability
company;
MRG Shareholders the shareholders of Marshall
Holdings;
MRG Shares the issued and outstanding common
stock of MRG;
NV the US state of Nevada;
Placing the placing of new ordinary
shares in the WH Smith to institutional
investors to raise approximately
GBP155 million before expenses;
PRA Prudential Regulatory Authority;
Purchase Price the total consideration for
the MRG Shares pursuant to the
SPA, being $400 million;
R&W Policy the warranty and indemnity insurance
obtained by WH Smith in respect
of the warranties and indemnities
contained in the SPA;
Resolution the resolution to be proposed
at the General Meeting to approve
the Transaction;
ROIC return on invested capital;
Shareholder Approval the approval of the Transaction
(as a Class 1 transaction under
the Listing Rules) by Shareholders;
Shareholders the holders of ordinary shares
of WH Smith
SPA the Stock Purchase Agreement
dated 17 October 2019 between
WH Smith, WH Smith USA and MRG
Holdings
Sq. ft. square foot;
Transaction the proposed acquisition of
Marshall Retail Group by WH
Smith, pursuant to the SPA;
UK 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;
US GAAP accounting principles generally
accepted in the United States;
WACC weighted average cost of capital;
WH Smith or WH Smith plc or the WH Smith plc, a public limited
Group company incorporated in England
and Wales, with registered number
05202036;
WH Smith USA WH Smith USA Holdings Inc.,
a Delaware corporation wholly
owned by WH Smith
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
ACQGMMMGGNFGLZG
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