Takko - Lessons from 2004

All,

Our stress test from March 17th showed the company scraping by on the basis it had to close for only 4 weeks. Clearly we are beyond that point now and the company announced today that it has retained a full suite of advisers as it is suspending coupon payments. The timing of the announcement also suggests that the initial "flood" of customers post lock-down is uninspiring.

The last time we restructured Takko was in 2004, when the LC facility was created from having to replace credit insurers. There are a few points to take away from that:

1) Takko is not New Look, but rather a dull discounter and the cost conscious customer will - if anything - be even more cost conscious in the future. Back then, the German labour market reform was hurting the business, but it sprung back within a year from restructuring. That may not be quite as rapid this time, but it will spring back - as will disposable income. There is no online alternative for that segment.

2) The LCs are a double-edged sword. On the one hand they rank sr. to the bonds. On the other, they merely replace the company’s credit insurance and thus greatly reduce the execution risk in a restructuring. 

3) Takko is a 10% EBITDA margin business on a normalised basis. The company had a tremendous summer 2019, but normalised sales 2021 may come back into the E1bn area (where they have been for over a decade) and so normalised EBITDA from next year cannot be assumed to lie above E100m. E80m may be a better level to start from (could be less).

4) Short-hand valuation therefore suggests: E500m of EV, less E150m of fresh cash (likely including RCF) and E250m of LCs, leases, expenses and other = E100m for the bonds / equity = 20c/E. 

5) Return: In the medium term, the LCs (non-cash credit insurance replacement) will invariably drop out of the valuation picture again and voila! 

2x money.

Wolfgang