TREND-News.com / It's official today: World Duty Free is for sale

TREND-News.com / It's official today: World Duty Free is for sale: "It's official today: World Duty Free is for sale"

By Doug Newhouse, 4 December 2007

World Duty Free Managing Director Mark Riches confirmed this afternoon that the world's second largest duty free and travel retail operator is up for sale, following completion of a strategic review by the company for BAA's owners, Airport Development and Investment Limited - the consortium led by 62% shareholder Spanish construction group Ferrovial which acquired BAA for £10bn ($20.6bn) in the summer of 2006.

As Riches stated, the news is not a complete surprise considering the intense speculation surrounding WDF and especially following comments from Ferrovial Financial Director Nicolas Villen in a first-half results conference call earlier this year where he acknowledged that WDF was 'not a strategic asset'.

In an exclusive conference call to TREND/The Business and The Moodie Report this afternoon he said that the world's worst secret was now out since the decision to sell World Duty Free has now been taken and this process will now start almost immediately. Riches said it was not an easy decision for Ferrovial because there were a number of factors that had to be taken into account, including the views of the CAA, but this process was now complete.

The full interview with Mark Riches will be posted on this website within the next hour. Meanwhile, see 'Executive analysis of pending World Duty Free sale' below and 'Comment' for detailed numbers and analysis].


EXECUTIVE ANALYSIS OF PENDING WORLD DUTY FREE SALE:

WHAT IS ON OFFER: World Duty Free operates 67 stores across BAA's seven UK airports, with 15,000sq m of retail space offering over 25,000 products. Its 2,000 employees support outlets located at the seven airports of Heathrow, Gatwick, Stansted, Glasgow, Edinburgh, Aberdeen and Southampton.

POTENTIALLY INTERESTED PARTIES: Private equity firms include Blackstone (the biggest of the PE companies listed here), along with Bridgepoint, 3i and Warburg Pincus. All have been linked to interest in World Duty Free, along with duty free operators Autogrill/Aldeasa/Alpha, Dufry, Lagardère/Aelia and Nuance. There are also dark horses out there who may emerge, including Heinemann, Crossbar, Lotte Duty Free, Duty Free Americas and others, although DFS Group is not thought to be interested in WDF directly.

WORLD DUTY FREE FINANCIALS: World Duty Free delivered net retail income contribution of £122m ($251.6m) to BAA/Ferrovial consortium in the nine months ended September 30 2007, a 9.2% increase on the £112m ($231m) generated over the corresponding period in 2006. During the same nine-month period to September 30 2007, WDF generated sales revenue increase of 7.6% to £306m ($631.3m) and an operating profit increase 11.6% to £21m ($43.3m).
This compared with sales revenue of £284m ($584.9m) for the first nine months of 2006 and an operating profit during this same period of £19m ($39.1m). By contrast, Ferrovial's 2006 annual report points to WDF revenues of E.575m ($847.4m) with EBITDA rising to E.39.7m ($58.2m). As a further guide to the size of the WDF business, in 2005/'06 its underlying revenues were up 3.2% to £385m ($794.2m) and underlying profit rose by 4% to £26m ($54m), alongside a contribution of £126m ($260m) in concession fees paid to BAA.

SHOP LOCATIONS: (Main departure lounge outlets) Heathrow terminals 1,2,3 and 4; London Gatwick North; London Gatwick South; London Stansted; Southampton; Glasgow; Edinburgh; and Aberdeen. (Arrivals shops) Heathrow Terminals 1,2,3 and 4; London Gatwick South; London Gatwick North; Edinburgh; and Glasgow.
(Important addition: From March 2008, World Duty Free will also be located in the all British Airways serviced Heathrow Terminal 5 where it will compete for passenger time and money with many other retail and food and beverage operations. Its retail 'competitors' in T5 will include: Accessorize; Chocolate Box; Coach; Dixons Tax Free; Dixons Tax Free Accessories; Glorious Britain; Harrods; Harrods Signature (souvenirs); HMV; Hughes & Hughes; Kurt Geiger; Links of London; M&S Simply Food; Mappin & Webb; Mont Blanc; Mulberry; Paul Smith Globe; PC World; Pen Shop; Prada; Reiss; Rolling Luggage; Smythson; Sunglass Hut; Ted Baker; Thomas Cook; Tiffany & Co; WHSmith (several locations).
WDF will operate about 3,250sq m of retail space in T5 when it opens from total retail space of around 22,000sq m allocated to the terminal.

SALES & MERCHANDISE MIX: WDF's beauty category accounts for more than 50% of all sales, followed by liquor, food, tax free, luxury goods and tobacco. The fact that WDF's sales in this category are equivalent to 20% of all prestige fragrance sales in the UK will not have been missed by potential buyers. As an indication of the size of this and WDF's other category sales, the retailer's 67 stores sell no less than 5m bottles of fragrance a year, 2m bottles of whisky and more than 0.6m bottles of wine.
WDF's overriding product strategy is to focus on five core merchandise categories: Beauty, Liquor, Tobacco, Confectionery and Fine Food and Selected Tax-Free goods. In addition to its main duty and tax free stores, WDF also operates a number of specialist shops such as World of Whiskies, Chocolates, Beauty Studio, Perfume Gallery, The Cigar House, Sunglasses and For Men.
It also operates what it calls 'share approach outlets' and these include: Jo Malone (Heathrow T3); Clinique Service Station (Gatwick North); Dior Voyage (Heathrow T4); MAC Studio (Heathrow T3 and London Stansted); Clarins Studio (Gatwick South); L'Oréal (Heathrow T4); and Molton Brown (Heathrow T4).

DEMOGRAPHICS: Taking the demographics of each airport and forecasting the potential penetration growth and spend from the varied passenger mixes at each will be a complex exercise for all bidders and will be key to any successful future operation.
Forecasting the impact on shops in the existing four terminals at Heathrow will be crucial considering that most of British Airways' passengers are moving to Heathrow Terminal 5 when it opens in March 2008. The impact will be big, considering that 25m passengers - and that is all of British Airway's passengers apart from Australasia, Spain and Italy - will be going through T5.
This will obviously reduce the amount of customers/passengers currently using Terminal 4, Terminal 3 and Terminal 1. Terminal 4 will be most affected. Stansted is just one other example where weighted forecasting will be necessary, considering that 90% of passengers are intra-EU, so most product sold to these customers does not carry duty free margins. This just underlines the fact that all bidders will have to make allowances for separating their rent structures for both EU and non-EU passengers, where both exist at a particular airport and one profile dominates the other.

NATURE OF THE SALE AND VALUATION: The nature of the sale looks likely to emerge as a partial payment upfront and percentage bids for each individual airport, with Heathrow obviously being the highest. Current market feeling and independent valuations presently lean towards a sale price of between £340m to £360m ($701.4m to $742.7m) but if an auction begins then the price could theoretically snowball as high as £450m to £500m ($928.3m to $1bn).
The Business understands that an effective RFP document containing information on the business is being released this week - and possibly even today - to companies that have expressed interest in buying the business. Needless to say, the usual confidential non-disclosure clause is expected to be prevalent in this document.
The fact that the aviation regulator the UK Civil Aviation Authority (CAA) has said that it is minded not to interfere with the WDF process is one thing [CAA statement made on November 20-Ed], but another is the fact is that post sale, any new owner of WDF could find itself working for more than one landlord if BAA is forced - or decides - to sell one or more of its airports in future. At the same time the CAA has made it known that it believes that the concession fee payable by any new owner of WDF should not be less than 30%.
BAA is understood to have given WDF a contract of up to around 12 years and the fact that The Business understands it will not be less than ten may help to explain part of the reason why BAA/Ferrovial & Co have taken so long to decide whether or not to sell. Apart from waiting to see whether the CAA would interfere/influence in the process - which it says it now won't - this longer term concession period obviously adds considerable value to any sale and will be reassuring for premium bidders and obviously for BAA, which wants to attract private equity bidders, as well as offers from duty and travel retail operators. WDF MD Mark Riches said this afternoon that he wasn't party to the RFP details but he wouldn't be surprised if the CAA recommendations hadn't influenced the RFP structure. But he added that to give further details would be inappropriate.

POINTERS FROM EXCLUSIVE INTERVIEW: In an exclusive interview with The Business/TREND six weeks ago WDF Managing Director Mark Riches said he was satisfied with the business performance over the past year, even factoring in the comparatively difficult period from August 10 in 2006 where heightened security measures severely disrupted the business.
Over the past year he reported that all product categories have performed well, with the exception of the cigarette sector which on trend continues to decline at around 7% to 8% a year - a long way off its once strong historical annual sales contribution of around £80m ($165m) a year.
More positively, Riches said that the liquor category has performed well and the Champagne sector within it in particular. Contrary to some comments elsewhere, Riches added that there is no slowdown in the important fragrance, skincare and colour sectors of the beauty offer, which he confirmed still accounts for more than 50% of WDF's total category sales mix. Another star performer - albeit from a much smaller base - is confectionery where he described the performance in the year to date as "quite stunnning" and approaching record sales levels this Christmas.

CURRENT SENIOR MANAGEMENT: Mark Riches, Managing Director, World Duty Free and BAA Global Retail; Jo O'Connor; Commercial Director; Fred Creighton, Retail Director; Sarah Jezard, Marketing Director World Duty Free and BAA Retail; Dan Curran, Head of Supply Chain World Duty Free and BAA Retail; Debbie Ansell; Head of Category, Beauty & Luxury Goods; Fraser Dunlop, Head of Category, Liquor & Tobacco; Rebecca Slater, Finance and IT Director; Julie Elder, Retail HR Director, BAA; and Sarah Branquinho, Business Relationships Director, BAA and World Duty Free.


COMMENT: While the sale of the company might not be regarded as the ideal tenth anniversary present by some within WDF, it does at least bring to an end a very unhelpful period of limbo for WDF's employees. WDF Managing Director Mark Riches understandably acknowledged in an interview with The Business six weeks ago that they have obviously been unsettled by the barrage of 'will they, won't they' sell stories that have appeared in the media sporadically over the last six months in particular.

But while speculation now shifts to who might emerge as the final owner of WDF, there will also be the inevitable questions surrounding the potential upsides and downsides for certain organisations, depending who the final buyer turns out to be. For example, there can be no doubt that based on statements by the company Autogrill could well be a leading contender as an acquirer. Now should this company be successful in any bid, then there may be competition issues concerning its separate ownership of the Alpha Airports Group which also operates many shops at UK airports.

The question then would be whether this would put AAG's retail arm into play? If this happened, then there might be several organisations who would be interested.

Then there are questions surrounding the private equity organisations that have been linked with WDF, including Blackstone, Bridgepoint, 3i and Warburg Pincus. Whether they are representing themselves (unlikely) or some of the operators that have also been linked with an acquiring interest in World Duty Free (more likely) is another matter. That there can be too many companies with the expertise, infrastructure, or deep pockets required to operate World Duty Free from a management perspective seems unlikely. Therefore the identities of those represented by these private equity organisations will only fuel yet more speculation as the sale process gathers momentum.

Then there is the big question of management style at the acquirer and whether they will continue with the spirit of partnership that WDF and BAA has pioneered quite successfully with its suppliers over the last five years in particular. Any offer for WDF which is too highly leveraged by debt will certainly not be in the best interests of preserving this legacy.

Then finally there is the relationship between the new acquirer and the airport managements at the various airports themselves. For the last decade there has been a clear team effort between WDF and its seven airport partners which has been greatly aided by the fact that both sides are all part of the same company. That will no longer be the case in future and new relationships will have to be forged quickly if any new acquirer is to maximise revenues at the same time that BAA will be reconfiguring the traffic flows at all four of its existing Heathrow Airport terminals next March, when most of its British Airways' passengers transfer to Heathrow Terminal 5.