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Elis (ELISGP; Ba1 Pos/BBB-) Confirms offer, limits leverage uplift; follow up

CONSUMER CYCLICALS

So it's giving indicative commitment to net 2.2x in year 1. We read this as by end of year and assume it is baking in deleveraging and growth in earnings through synergies.

  • The combined entity would generate ~€1.9b of EBTIDA and €500m of FCF and should give it 0.26x turns of equivalent deleveraging firepower on cash generation. Assuming earnings growth from Elis + synergies we add another 0.3x of natural deleveraging.
  • We conservatively put in a net 2.8x on acquisition close (company reported which excludes leases) or net 3.1x including.
  • That implies it will take on €2.4b in debt. It has €1.5b coming already with Vestis - not leases so will be included in co's net calculation - leaving €0.9b for issuance.
  • The total shortfall to financing the current equity value of €1.7b would be €0.8b - now implied this will be equity financed.
  • Our rating assumptions are unch; S&P will likely stay in IG to save face while above numbers are not enough to pressure Moody's downgrade into Ba2. It has a downgrade threshold of 3.5x; above implies gross, incl. leases leverage would be at 3.4x on close.

The above is a move away from the full debt funding it used in its last large transaction we could find (2017; £2.2b) but as we suspected it has more motivation here to protect the BS - at the cusp of entering IG. We pare back some of our earlier optimism given we may still be looking at 2-tranche supply here - Elis only has € debt - but it's sitll positive to see the BS comments come so early in this process.

Vestis equities are not confident; it fell -6% on Friday and is only trading ~6% above pre-rumour levels.

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