Selecta - Conviction - Positioning
All,
Please find our updated analysis of Selecta here.
In light of the spectacular collapse of Selecta revenues in H224, it is naturally with great scepticism that we view unsubstantiated growth projections like those attached on the last slide of the presentation. However, having modelled the likely scenario that has unfolded, we feel more assured and that warning to the 1Os about majority voting thresholds could yet work in our favour.
Investment Rationale:
- We will follow our rights in the residual 2Lns to subscribe to New Money 2O paper for 15% for approx. 2% of NAV. Given the low voting threshold to amend the proposed 1O Notes, we suspect the 2O Notes will sit in an attractive position at around 5x 2025 EBITDA, better than the 5.5x we are calculating in the Recap Table since that assumes 100% conversion of 3O into 1O paper.
- The budget that Selecta supplied with the restructuring proposal seems fair, not too ambitious, but far from safe. Failure to achieve budget would be the primary risk to our position.
- On its own, we think the 15% PIK and the attached equity option are a touch poor for the risk inherent in the limited information we have been provided. However, we consider ourselves well aligned with the group driving this bus and draw some comfort from that. We'll be sitting with everyone in BidCo, structurally pari passu with everyone except behind the RCF.
Key Insights:
- After modelling, we are more confident in the projections than initially expected. The growth assumptions in the business plan are less ambitious than they appear; Q4 2024’s underperformance likely stemmed from negative trading margin. If correct, recovery depends mostly on trading profits returning to below historical levels (See Model). Again, if correct, the remaining revenue growth hinges on modest SMD (Sales per Machine Day) increases. Assuming flat machine numbers, low single-digit SMD growth from 2024 levels is sufficient and reasonable (See Model).
- Machine count assumptions are uncertain. The budget runs down historic machine lease payments—implying either lease discontinuation or asset buyouts. Given higher forward CapEx, we assume the machine base remains stable or improves via larger machines (more Public vs. fewer water coolers for instance) (See Model).
- A key budget component is reducing extraordinary items, which have weighed heavily on cash flows in recent years (See Model). The budget, however, eventually assumes unlikely zero one-offs.
- In the recap, 1Ls take a haircut to 73x/€ before accounting for 3O PIK notes; they cede value to the 2LNs (See Recap Table). The 2LNs are out of the money but can recover ~8c/€ in option-value equity if they contribute fresh capital between the new 1L instruments (Recap Table). Even so, post-restructuring Selecta remains highly levered (Recap Table).
- The late 2024 collapse was unusually severe, even for Selecta. While inflation and weak consumer sentiment were headwinds, they alone don’t explain the Q3–Q4 revenue plunge (See Quarterly Updates). Despite concerns and a number of open questions, we do not adjust valuation beyond what the forecast cash flows imply (Quarterly Updates) as we don't see a sudden secular trend against vending. We have revised valuation downward only slightly due to poor recent performance and high uncertainty, exacerbated by deteriorating reporting since Q3 2024 (Valuation).
- The budget halts the aggressive machine fleet reduction that triggered heavy one-offs. The prior strategy was too capital-intensive for KKR’s horizon. Current assumptions seem reasonable, though management execution risk remains (Valuation).
- Route density, once a key efficiency metric, was deprioritised during Selecta’s expansion phase. Since 2021, fleet cuts have focused on eliminating loss-making contracts and telemetry rather than optimising density (Route Density). We still feel that weak density is where it's at for Selecta.
Looking forward to discussing this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk