Douglas - Updated Analysis and Model

All,cPlease find our updated model and analysis on Douglas here.

Bonds:

Both bonds are trading rich and we had originally planned on shorting the SSNs if they got that far ahead of themselves. However, aside from an increase of 0.3x leverage to 6.3x by year-end, we are not seeing a dramatic catalyst in the short term.

Christmas:

By contrast, a successful Christmas (Q1) could see the company stabilise and that would be a further positive - catalyst for the SUNs.

Expenses:

Further, the company is not expecting to make any further large-scale acquisitions and thus expenses from restructuring and integration should slow down. All else equal, this should go some way to raising Interest coverage from the current 1.3x to some 1.5x. If the market remains as bullish as it is now, perhaps that is sufficient to make them refinanceable.

Competitive Pressure:

But not all will remain equal. We do feel that the market is underestimating the competitiveness of Flaconi. Owned by Pro7 under an Equity for Media agreement, the company’s payments to its shareholder are within Opex. Thus it does not need to be as profitable as Douglas claim and it therefore can continue to buy growth with discounts and rebates. We are certainly expecting further margin pressure from that side, especially as a German public may become more price conscious in the current economic environment.

Germany:

By our arithmetic, profitability of the German store chain continues to slide. It is only when mixed with German online or international store chains that the company can present a marginally positive picture. While "marginally positive” is already a great achievement, there is material risk that its pressure on overall margin intensifies.

So with bonds having recently traded up as much as they have, we will remain on the sidelines for a while, looking for further intelligence on how the price war is developing into the all-important Christmas period.

Wolfgang