|Shares Out. (in M):||254||P/E||0.0x||0.0x|
|Market Cap (in M):||1,529||P/FCF||0.0x||0.0x|
|Net Debt (in M):||665||EBIT||0||0|
Italian “Sibling Rivalry” Masks Autogrill Normalized Free Cash Flow
The “Optical Underdog” in the demerger will reveal an entity with huge transformational capabilities led by a Proven, Empire-Dismantling, Shareholder Friendly and Aligned CEO
Autogrill (AGL:IM) demerged yesterday into two separate listed entities on October 1, 2013: World Duty Free (WDF:IM) and Autogrill (AGL:IM). World Duty Free is a good business which I believe is a straight forward analysis and somewhat undervalued relative to a somewhat overvalued Dufry, its closest competitor, but does not possess the explosive reversal of fortune, hyper-contrarian bet on best-in-class management that “new” Autogrill does. I forsee a dramatic step-change in free cash flow (explained below), paving the way for implementation of a series of transformational events that will unlock an explosive increase in shareholder value in the coming 24-30 months. I would be guessing if I tried to estimate what the upside would be, as I imagine we all would, given the numerous possibilities available to AGL (to be noted that management actively pushed from the deconsolidation of “the empire” after a history of value-creating acquisitions and few disposals). Also to be noted that both businesses possess intelligent and value enhancing M&A opportunities on a standalone basis that together were less easily achievable.
Why is a concession burning cash? Because Autogrill is a complex group, assembling the precise pieces was not obvious, and I have not seen the explanation offered in any initiation reports. Some digging revealed obscene rental costs of an estimated 17% of revenues along the Italian motorway concessions (roughly €1bn revenues accounting for €170mm of annual cash flow and €50mm of capex) attributable to legacy rental agreements entered into with its “sister company,” the leading highway operator and Benetton holding Atlantia (ATL: IM). Importantly the majority of these agreements come due within the next 24-30 months, and more importantly, there is no corporate governance confusion forcing renewal whatsoever (Tondato has the full-backing of the Benetton family and has committed to the market to exit this business entirely if healthy cash generation is not feasible).
Management: "As good as it Gets"
A bit about management: CEO Gianmario Tondato is among the best managers not only in Italy but globally. He possesses the attributes of an innovator, a brilliant and extremely disciplined m&a visionary, and an excellent retailer.
(1) he is as efficient as any CEO I have ever seen – Autogrill has been operated with less than 0.5% Overhead margin since he has been CEO (not a typo), down from 25% of sales at IPO. (2) He has incredible vision, courage, timing, discipline, and ability to integrate assets thoughtfully but ruthlessly. He is stylistically among the most anglo-saxon managers you will find in Italy, butfrankly better than most anglo saxon managers, particularly when you consider he began with the portfolio that is now the "pig" of the Group, and everything else, including the buildup and spinoff of World Duty Free, was his creative reallocation of resources away from the structurally declining busineses he inherited (3) Unlike many retail managers that modify the business model and forever alienate the customer, or to the contrary cut costs and run the retailer into the ground, Tondato has his finger on the pulse of trend innovation. A bold move such as this demerger would have sparked tremendous speculation for impending value creation potential had it come from a manager with a global reputation commensurate with Tondanto’s proven capabilities. Tondato is egoless, avoids the spotlight, and is almost neurotically shy in interacting with investors (but he appears to be changing!). So please, if you want to be confident in the opportunity, press to speak or meet with him directly, and bypass IR and the CFO (obviously having done your homework in advance).
Additionally, unlike most family held Italian companies, Tondanto has more than earned the full trust and support of the Benetton family to implement his vision. Here, in my view, he is dismantling an empire to give each company a chance to enter into transformational transactions, as well as capitalize on timing. As you will see below, the value implicit in exiting the Italian motorway business is greater than the current market capitalization of the new Autogrill. Beginning in 2016 the majority of truly extortionist, legacy, long-term rental contracts will expire (unsurprisingly which emanate from sister company Atlantia, the Benetton publicly traded highway operator in Italy and more recently abroad, where Legacy Autogrill retail outlets were originally built.) I personally hope Tondato exits this business entirely, because his ability to generate value with a less capital intensive platform, immune from the vicissitudes of benzene prices, would allow him to demonstrate his potential to its fullest.
The “New” Autogrill:
Post demerger, Autogrill is the world’s leading operator in food and beverage services for travelers. It operates via restaurants located in airports, motorway service stations, and railway stations. Autogrill often operates concessions on behalf of prestigious brands (Starbucks, Burger King, etc) under long-term (sometimes exclusive) contracts in a given outlet. AGL runs its businesses (both restaurants and retail shops) through concession contracts with landlords (the owners of the airport or the motorway). AGL pays a concession fee to the landlord and is fully responsible for the outlet’s P&L. The average AGL concession contract has a duration of around 8 years. As opposed to a typical retail setting, one based in an airport or along motorways enjoy a favorable “captive demographic” and, as a result, high visibility with regard to FCF generated during the concession period. AGL enjoys very high market shares in the F&B business within North American airports and along Italian motorways. Among the main competitors there are private companies, such as Elior and SSP. In particular, EQT, the Swedish Investment Fund owned by the Wallenberg Family has brought in one of the most talented retail turnaround CEOs I have ever come across – Kate Swann – to maximize their recovery value on an asset with more than 6 turns of leverage. The debt, coincidentally, must be repaid starting in 2016. A combination at the right price between AGL and SSP would yield a very interesting combination, as the customer overlap base, and therefore negotiating leverage, becomes something of great value, aside from the synergies generated in complimentary geographies on cost of goods and headcount. AGL is active in 22 out of the top 25 US airports, accounting for 68% of US traffic. AGL is the leading operator, ten times the size of its largest competitor. In North America AGL particularly operates renowned brands (80% of its revenues) and only partially through proprietary brands.
|Exit Italian Motorway Entirely||Share Price||€ 6.02|
|ITA Motorway Revenues||€ 925.0||€ 950.0||€ 975.0||Market Capitalization||€ 1,529.1|
|Saved Rent||138.8||166.9||195.0||Enterprise Value||€ 2,194.1|
|Total Cash Savings||168.8||191.9||215.0|
|Target Free Cash Flow Yield||11%||10%||9%|
|Value Creation||€ 1,534.1||€ 1,961.5||€ 2,388.9|
|Enterprise Value||€ 2,194.1||€ 2,194.1||€ 2,194.1|
|Implied EV Value for Remaining AGL||€ 660.0||€ 232.6||(€ 194.8)|
|Revenues||3985||3970||4125||€ 3,035.0||€ 3,095.7||€ 3,157.6||€ 3,220.8||€ 3,285.2||€ 3,350.9|
|COGS||€ 3,381.0||€ 3,368.3||€ 3,499.8||€ 2,575.00||€ 2,631.35||€ 2,683.97||€ 2,737.65||€ 2,792.40||€ 2,848.25|
|EBITDA||315||360||380||460||€ 464.36||€ 473.64||€ 483.11||€ 492.78||€ 502.63|
|Interest Expense||(€ 45.89)||(€ 44.42)||(€ 36.48)||(€ 27.28)||(€ 14.08)||(€ 0.14)||€ 0.00||€ 0.00||€ 0.00|
|EBT||€ 69.1||€ 115.6||€ 143.5||€ 232.7||€ 246.3||€ 265.4||€ 270.9||€ 276.3||€ 281.8|
|Less: Taxes||€ 24.2||€ 40.5||€ 50.2||€ 81.5||€ 86.2||€ 92.9||€ 94.8||€ 96.7||€ 98.6|
|Less: Capex||€ 160.0||€ 160.0||€ 160.0||€ 160.0||€ 162.0||€ 164.0||€ 165.0||€ 165.0||€ 165.0|
|Free Cash Flow For Debt Repayment||€ 21.2||€ 115.1||€ 133.3||€ 191.3||€ 202.1||€ 216.6||€ 223.3||€ 231.1||€ 239.0|
|Debt (BOY)||€ 665.0||€ 643.8||€ 528.6||€ 395.4||€ 204.1||€ 2.0||€ 0.0||€ 0.0||€ 0.0|
|Debt (EOY)||€ 643.8||€ 528.6||€ 395.4||€ 204.1||€ 2.0||€ 0.0||€ 0.0||€ 0.0||€ 0.0|
|Cash to Equity||€ 216.6||€ 223.3||€ 231.1||€ 239.0|
|Cash Build||€ 0.0||€ 216.6||€ 223.3||€ 231.1||€ 239.0|
|Enterprise Value (EOY)||€ 2,172.8||€ 2,057.7||€ 1,924.4||€ 1,529.1||€ 1,529.1||€ 1,312.5||€ 1,089.2||€ 858.1||€ 619.1|
|Market Capitalization||€ 1,529.1||€ 1,529.1||€ 1,529.1||€ 1,529.1||€ 1,529.1||€ 1,312.5||€ 1,089.2||€ 858.1||€ 619.1|
|Less: Value Created From ITA Closures||€ 1,961.5||€ 1,961.5||€ 1,961.5||€ 1,961.5||€ 1,961.5||€ 1,961.5|
|Adjusted Market Capitalization||(€ 432.4)||(€ 432.4)||(€ 649.0)||(€ 872.3)||(€ 1,103.4)||(€ 1,342.4)|
|Adjusted Enterprise Value||€ 232.6|
|Discounted Operating Cash Flows||€ 1,623.0|
|% of Fair Value Day 1||14%|
This investment requires an investor base with the ability to become confident enough in the explosive upside that macro volatility prior to portfolio reshuffling does not phase them.
|Entry||10/03/2013 05:36 AM|
A clarification: with respect to your ITA motorway business, the "Lost EBITDA" (i.e. 20mm in Average case) does NOT include the egregious rent? So is it "Lost EBITDAR" rather than "Lost EBITDA"? Including the egregious rent, are you saying that the EBITDA of the to-be-exited motorway business (average case) is -146.9mm?
Relatedly, when I see the company presentation EBITDA FY13 guidance of 315-325mm, I would assume that includes the egregious rent at the motorways, no?
If I understand correctly, we are getting a good business with EBITDA of about 465mm and a horrible business with EBITDA of about -145mm, which we will exit in 2.5 years--after-tax FCF is probably about 110mm. So, we can think about adj TEV = 2194 + 2.5 * 110 = 2,414 and adj EBITDA of good business of 465mm?
I am just asking ballpark because I want to make certain I understand your general argument. My fear is that your Lost EBITDA includes the egregious rent, and then I think there is a problem.
|Entry||10/03/2013 08:52 AM|
I have done some research since my initial post, and I believe that your interpretation contravenes that of services like The Spinoff Report. They seem to believe that the motorway business produces (limited) positive EBITDA, even with the onerous rental agreements included. In other words, if they discontinued those contracts, the rest of the business would produce 300mm-ish of EBITDA. We are buying for about 2200, or 7.3x.
To be clear, everyone agrees these motorway businesses with sister company are more or less worthless, but you are arguing they are producing huge negative cash flows that are massively distorting the aggregate numbers, no?
If I am correctly interpreting your Adjusted Enterprise Value method above, you are arguing that EBITDA would jump to 460-ish if they discontinued those contracts (at no cost). If you are correct, then I would agree this would be a home-run, but in looking through the company presentations, I cannot find anything to support what I think you are saying. But perhaps I am missing something big.
|Subject||RE: RE: RE: EBITDA|
|Entry||10/03/2013 10:34 AM|
I am just singing to the choir, but I think that cgnlm is double unwinding the rent payments erroneously.
I think the eu87mm Italian Motorways you state may contain some locations not on the "sister" highways, but either way I see ample evidence that the "sister" business is "weak" (i.e. EBITDA-capex is zero-ish) and struggling a bit but not that EBITDA - capex is negative $200mm.
It is reasonable to assume that there will be a reset in rents in 2.5 years and so perhaps we should add a bit to the motorway business, but that gets me to 7x EBITDA. Interesting but hardly compelling.
As an aside, I have a friend in Europe who will not stop at any highway restaurant except Autogrill. Absolutely swears by them.
|Entry||10/03/2013 06:20 PM|
hi all. the 20 million figure of lost ebitda pertains to 5 stores. maybe it is 30. i got tens of millions for 5 flagship stores. so i eliminated all the stores because brand management is not worth the money. 2013 is way down from 2012. the airport while 7% or so of Italy is making up for a ton of losses on the motorway. also i am focused on capex because each stores is run down with a few exceptions and require a lot of money to maintain. he has been cutting back and traffic has slowed. you have to realize that in each major city center autogrill has tons of traffic. so even if 10% of the highway is penetrated, the average ticket is extremely low (a 75c espresso). it is like a supermarket with an average ticket below a euro in most instances.
|Subject||RE: RE: RE: EBITDA|
|Entry||10/04/2013 01:15 AM|
ebitda is not cash flow. the cash flow was more like 20mm total and perhaps 200% of that came from those few stores, only because the city center autogrills are owned. so keep those. i guess marketing spend isnt efficient but i know the guy he will just fire the marketing department. this year rents went up with euribor, traffic declined, average ticket declined, and it is a dinosaur of a business. the burkerkings however, those are great. in case it wasnt obvious i live in Italy and know realitively well management. in reality the average wait at a register is 7-10 minutes because they have taken every action possible to cut back. the bathrooms are uninhabitable. yes they are rolling out clever concepts but when you have so much good predictable captive demand why ever pander to legacy. i wish i had precise numbers for you but i can only ball park based on commentary i have picked up on. the italian analysts will tell you that the woman in IR is the worst in italy which is really quite an accomplishment. there is a reason that Tondato plants the idea of exiting italy in the press regularly. he is taking a page from the marchionne playbook. preparing the unions and politicians.
|Subject||RE: RE: RE: EBITDA|
|Entry||10/04/2013 01:21 AM|
compare gasoline as a percent of wallet share in italy versus the US. with interest rates still relatively low, i would argue that this dismal performance is likely to be the best it will ever be. Then if I am not mistaken there is an inflation linked brand royalty that goes to Atlantia also. I asked them and they sort of averted the question in saying that the ASPI (Autostrade per L'Italia brand is often licensed). I excluded that cost which is linked on a store by store basis but below the line for conservatism... if you want to call Atlantia and ask how the transfer of wealth works, be my guest :) They know they are under attack and furthermore Atlantia management does not have the confidence of the family as Tondato does. A crucial point.
|Entry||10/04/2013 06:04 PM|
thank you and yes they will - just talk to tondato. given that it is one Benetton passing funds to the other, verify it- also ask atlantia where the majority of service area license income comes from---usually autogrill is a big store and a small benzene station next to it. ask them if it is based on square meters. i am buying an asser from them on the PE side and pay a fixed royalkty of c. 5mm on 24mm of revenues. welcome to Altantia. :)
|Subject||RE: RE: RE: RE: RE: EBITDA|
|Entry||10/04/2013 06:54 PM|
I think what you might be missing, but I will wait to have a more satisfying reply for you tomorrow when I call mgmt, is that in Italian airports Autogrill operates under its own brands and does not run a concession or operate under someone elses name and profit share. Malpensa the second largest airport in Italy must have 12-15 proprietary shops and because it is an international airport and most people are going east, you have to be there early morning. orange juice+cappucino+croissant 7 euros (based on a lot of personal experience). I am going to guess that every 30 minutes 75 people rotate in and out (they make the tables very small, sticky, and no one wants to linger)..this is the one closest to the entrance. But the reality is, the coffee orange juice and brioche is amazing. This is true for Linate where I recall 50% of travelers depart and return in the same day. I do know that management calls the sticky table outlet an ATM but to put numbers to it I need a day. In the interim let me check a public company that by contrast has a profit share arrangement to show the difference.
|Subject||RE: RE: RE: RE: RE: RE: EBITDA|
|Entry||10/04/2013 07:25 PM|
Here is a start: lets take Milan (because that is where I live so I know the monopoly Autogrill enjoys). Its parent company strangely offered a lot of information on Linate and Malpensa combined up until 2010.
(Società Esercizi Aeroportuali)
In 2010 Autogrill plus a few other stores made a total of 60% margins.
I think its reasonable to assume the ratio was the same - I would guess at least 2/3 of revenue are Autogrill - there are really no competing food and beverage locations (or if so, very poorly located and largely empty)
|Subject||RE: RE: RE: RE: RE: RE: RE: EBITDA|
|Entry||10/04/2013 07:27 PM|
sorry in case that wasnt clear, take 1-the percent profitability to get ebit. add back whatever you want for d&a. the financials are that of the airport owner which is the province of lombardy and somehow they are public through 2010. I just want to give an idea. I intend to get granular answers tomorrow.
|Subject||RE: RE: RE: Rents|
|Entry||10/04/2013 09:09 PM|
well, if i can be honest, and double lock my door tonight, it appears that sicilian black money operators come in and bid just replacing autogrill. so in essence, while it is not exactly the desired outcome, and the stores look horrendous, often not even repainted showing remnants of the Autogrill logo, the income continues to flow.
i found something interesting. penetration in western europe airports on average is 80%. The average autogrill F&B ticket is 5 Euros.
If we assume half of the penetration is for food, we arrive at 40mm EBITDA. Then I found in the Malpensa annual report that rent/sales was 1% in 2011. I will confirm this figure with management. f2i is an infrastructure fund that i believe is open-ended and listed and may require disclosure.
Autogrill operates in 10 of the top 12 airports. Lets multiply by 4 to keep life easy and say that accounts for all EBITDA. You arrive at 160mm. So I guess if I have interpolated all this random data correctly with of course a margin of error, then yes it is entirely possible that airports make up for tollroads. I have never asked this to management and I expect that either I am dead wrong in which case they will say you miscalculated because xyz, or they will say little except airports FOR US in Italy are very profitable. On the other hand, airports FOR THE MUNICIPALITIES are a disaster. Net profit for the 8 or so I just studied was barely €1mm best case.
Now, I go to sleep, as I am 6 hours ahead.
Thanks for all the good questions.
|Subject||Timing of step-change|
|Entry||05/09/2014 04:44 AM|
I have been following your post but have not done the work yet; i was was wondering if you have a view on when the "legacy usurious rent expenses " you talked about will expiry ? Has the company indicated a time-frame at all?
Many thanks for an interesting write up