Sodexo (SWFP; Baa1 Neg/BBB+/BBB+) is reportedly eyeing Aramark (€17b)
No end to consumer M&A. This time it is the French caterer Sodexo and makes the perennially tight curve more interesting for a change. Please note it has a £250m sterling line and $ lines. Bloomberg is carrying the leaks and says "
Sodexo has been discussing a possible purchase of Aramark on and off in recent months, according to the people". For those that need a connection, Aramark spun-off Vestis - the uniform & workplace supplier in 2019. Vestis of-course has been in headlines recently as Elis - another French co - eyes it for takeover.
We see a ~€10b cash short-fall that could see sizeable supply and leverage moving from net 2.6x to 7.5x. 50% equity financing would move that down to 5.4x and we do expect some mix given co's conservative approach to BS (net 1-2x target). Aramark is doing well and runs similar margins. We have concerns around regulatory approval; globally the big three caterers are Sodexo, Aramark and Compass - latter also a local issuer. Alleviating that is fact catering market is highly fragmented; combined we see the two with a 10% global market share only. Aramark equities are +10% in US pre-market, Sodexo -8% this morning while perennially tight cash curve is +5-6bps - we would stay clear of latter and price to 1-notch downgrade at the least. Calc's below for those that want it.
- Sodexo was net/gross 2.6x/3.5x levered at end of June. It reported a lower net 2.3x as it excludes the €800m in leases. It targets net 1-2x. For leverage we are using a forward adj. EBITDA of €1.5b (c1.6b) keeping in mind current guidance is for org. revenue growth of +6-8% and EBIT margin expansion of 30-40bps. Note it has made some positive adjustments to where it records client investment amortisation (moved out from capex into D&A) which has boosted adj. EBITDA.
- Aramark is up +10% in pre-market and we add another 20% premium to get a EV of €16.6b - €5.2b of that is net debt leaving a cash short-fall for funding the purchase of ~€10b - full debt funding would see that much supply.
- Aramark is 4.8x/4.5x levered and reports a lower net 4.2x as it excludes $300m in leases and some adj. to cash inclusion. We are using a forward EBITDA of $1.3b (€1.2b) keeping in mind co's guidance for FY organic growth of +10%, adj. EPS growth of +35% and leverage at net 3.5x (we assume bulk of that on its adj. earnings growth).
- Combined revenue would be just shy of €40b, €1.1b/yr in FCF (on current capex) and EBITDA of €2.8b (at a 7% margin). Sodexo is slightly margin dilutive (6.7% vs. 7%) - similar ranges though and both are running growth (headline & margins). We see net leverage moving to 7.5x. 50% equity financing would move it to net 5.4x pro-forma.