Douglas - Great P&L, but what now
All,
Please refer to our unchanged analysis here.
It’s, of course, fantastic to see one of your biggest positions pop like that, but what should we really expect next week?
Events are clearly suggesting that CVC will not choose an aggressive route to restructure the Subs. For the last 9 months, every advisor in Germany (having little else to do) has been patrolling CVC’s offices to compete on who can pitch the most aggressive use of the new law. But as we have written extensively, there is little to be gained from all the uncertainty.
Maturities and Capital Structure:
- Even for a 2022 IPO the cascade of maturities is too short-dated. So the capital structure needs to be refinanced, come what may.
- The new credit documents should allow for a CoC from the IPO. But leverage seems somewhat too high to survive an IPO without at least partial pay down.
- RM accounts in the SSNs will prefer a new capital structure without the small SUNs behind them.
Liquidity:
- Sales were down less than 10% apparently, which sounds good, but earnings will have taken a hit. We suspect that Douglas may have sacrificed margin for volume in an effort to shore up liquidity and trade out of its high stock levels. Liquidity was tight before Christmas and it will have to be tighter now. While it's possible that its suppliers have extended terms again, those are unlikely to remain sustainable through the IPO.
- The company is probably thinking about how to present its soaring performance in 2022. So it should restructure its estate as quickly as possible - potentially carving out the 550 store closures as “discontinued operations” to present cleaner numbers going forward. Management may also be looking to close these stores more quickly than initially intended, which would require more cash in the shorter term.
- In preparation for the IPO and for general corporate growth purposes CVC will want to bestow Douglas with more liquidity to maximise their value.
-> So Douglas will need to:
- refinance with IPO’able debt
- receive a cash injection
Expectations - upside:
- CVC to inject fresh cash. More than Permira on Lowell, CVC will have been overrun with proposals to finance their equity stake further up the structure and we do not know if CVC even need it. The sponsor never had to inject significant fresh cash and we don’t think has written off any part of their 900m investment. So the liquidity should be there.
- We expect Douglas to refinance with a single layer of debt, rolling the volume of the Subs into the SSNs (see Lowell). A portion of that debt would likely be paid down with IPO proceeds. If CVC are more confident, the sponsor might choose to take some of the excess leverage out before the IPO - now and pay it down afterwards with proceeds.
Expectations - downside:
- CVC inject fresh cash as above.
- The RCF and SSNs roll into the longer-dated paper.
- The Subs are asked to roll into a PIK instrument or a smaller instrument with warrants. However, in this scenario, we would fully expect the package to equate to an above-par valuation in management’s base case.
At this time we hold on to our above 6% of NAV position in the Subs.
Here to discuss,
Wolfgang
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E: wfelix@sarria.co.uk
T: +44 203 744 7003