Mon 05/16/2022 05:05 AM
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Lenders considering Sweden-based business-to-business, or B2B, distribution services provider OptiGroup’s €515 million term loan B and €50 million delayed draw term loan B noted the company’s significant free cash flow generation and the yield of over 7% considering price talk of Euribor+525 bps with an OID in the range of 94 and 95, which is generous for a B2 /B/ B+ rated credit. However, the company faces risks including the possible entry of larger players like Amazon into its market, structurally declining paper segment, exposure to cyclical end markets, and likelihood of clients going straight to suppliers, bypassing OptiGroup, prospective lenders said.

However, OptiGroup is well managed, resilient, capital expenditure-light and adds value to clients, while its strategy of consolidating the market, starting in the Nordics and moving into Europe as well as increasing suppliers makes sense, one buysider said.

The debt is being raised to fund the concurrent acquisitions of OptiGroup and Dutch B2B distribution business Hygos by FSN Capital Partners. The deal includes €655 million of equity, including reinvestment from OptiGroup and Hygos shareholders, resulting in a solid 53% equity of net total capitalization.

OptiGroup operates in 16 countries but about 75% of its sales are generated in the Nordics and the Netherlands. The company has three main business areas: facility, safety and food service, or FSF, packaging, and paper and business supplies, or PBS. In fiscal 2021, OptiGroup generated €1.143 million of sales and €87 million of adjusted EBITDA on a post-IFRS 16 basis, resulting in a 7.6% margin. Hygos is active across FSF, and medical care products and disposables. It generated €215 million of sales and €36 million post-IFRS 16 adjusted EBITDA in the same period, which corresponds to a 16.7% margin. The combined company will have pro forma net leverage of 4.3x, based on fiscal 2021 pro forma adjusted EBITDA of €135 million.

While the combination of OptiGroup with Hygos’ higher-margin activities is certainly positive, the combined company will still have a relatively low margin of 10% on a pro forma adjusted basis, according to the company’s internal calculations, but possibly lower, prospective lenders noted. And OptiGroup’s margin, which was 7.6% last year, is lower than the margin of its competitor Bunzl, one buysider said.

Meanwhile, the combined group’s margin is likely to come under pressure, while leverage will probably rise as the positive impact of the Covid-19 pandemic on certain parts of the combined company (medical, Covid-19-related sanitary supplies for restaurants and other businesses) unwinds over coming months, another buysider said. Meanwhile, the negative impact of Covid-19 on the company’s structurally declining paper segments is unlikely to be reversed, the buysider added.

In the pro forma business, the FSF segment accounts for about 32% of sales, with packaging accounting for another 30%, medical 2%, specialty paper 15% and commodity paper 21%, on the basis of fiscal 2021 pro forma sales.

Based on expectations of around €130 million of EBITDA, cash interest of about €30 million, cash taxes of €20 million, capex of €15 million, assuming flat working capital, the company can generate over €60 million of FCF, which is attractive. However, the company will struggle to grow, and even maintain its current size, unless it continues to make acquisitions, which means that any FCF it generates will be used for acquisitions with no or very little deleveraging, buysiders said.

OptiGroup’s sales have declined over recent years, falling to €1.107 billion for the 12 months to October 2021 from €1.203 billion in fiscal 2018, however that was driven by a focus on improving margins, which resulted in OptiGroup’s EBITDA rising to €67 million in the 12 months to October from €47 million in fiscal 2019 on an adjusted pre-IFRS 16 basis, which one buysider said the company attributes to it strategy of getting out of bad contracts in favor of more profitable ones. But the buysider complained that the company will not provide volumes, which he said he suspects are flat.

The company’s performance is also highly GDP growth-correlated and will be exposed to future margin compression as economic conditions worsen, lenders noted. But OptiGroup does benefit from a good cost pass through mechanism, buysiders highlighted. Given its large number of small customers, the group generates around 85% of its sales from spot contracts while its suppliers are required to provide two months to three months notice of price increases, which means OptiGroup faces no lag in terms of pass-throughs for the bulk of its input costs. The remaining 15% of sales are through long term multi-year contracts, under which OptiGroup can renegotiate prices every three months to six months. The group is also insulated from rising logistics costs since its own warehousing contracts are not indexed to inflation and it is able to pass through fuel costs via a distributor fee, sources noted.

However, the company faces potential risks from larger players such as Amazon, Office Depot or Staples entering its space and increasing competition. Some of OptiGroup’s clients also have direct relationships with suppliers and could source supplies directly from them, lenders said.

And there are also integration risks related to past and future acquisitions, especially considering the group’s lack of centralization, one lender said. However, OptiGroup has a strong track record integrating acquisitions, another lender noted.

The deal was pre-marketed, and a significant amount of the books was covered before wider syndication started. One buyside source said he heard between €400 million and €420 million had been covered in pre-marketing, however another buysider questioned this.

One potential drawback for some is that the sponsor, FSN Capital, is relatively unknown outside the Nordics region. However that is not necessarily a bad thing, two lenders noted, given that it meant the sponsor had to make it as easy as possible for buysiders in terms of documentation, offering what one lender described as 2015-style covenants to further sweeten the pill. It also helps that FSN Capital is local and given that this is a big deal relative to the size of its funds, the sponsor will be more committed to the deal and keep its eye on the ball, a second lender said.

In any case, despite concerns about the company, generous pricing and robust cash flow generation mean the deal will most likely succeed, which is no mean feat in a difficult market where few primary deals are making it across the line, and those that do offer yields north of 7% (See La Liga’s bond pricing), lenders said.

Jefferies is leading on the deal. It is joined as physical bookrunner by JPMorgan. Danske Bank is joint bookrunner. Jefferies was contacted but had not responded by the time of publication.

Commitments are due at 10 a.m. BST on Tuesday, May 17.

OptiGroup’s capital structure is below:
 
OptiGroup - Pro Forma as of 05/06/2022
 
12/31/2021
 
EBITDA Multiple
(EUR in Millions)
Amount
Price
Mkt. Val.
Maturity
Rate
Yield
Book
Market
 
€60M Senior Secured RCF due 2028
-
 
-
2028
 
 
 
€515M Senior Secured Term Loan B due 2029
515.0
 
515.0
2029
 
 
 
€75M Delayed Draw Term Loan due 2029
-
 
-
2029
 
 
 
Total Senior Secured Debt
515.0
 
515.0
 
3.8x
3.8x
IFRS 16 Leases
88.0
 
88.0
 
 
 
 
Total IFRS 16 Leases
88.0
 
88.0
 
4.5x
4.5x
Total Debt
603.0
 
603.0
 
4.5x
4.5x
Less: Cash and Equivalents
(15.0)
 
(15.0)
 
Net Debt
588.0
 
588.0
 
4.4x
4.4x
Operating Metrics
LTM Reported EBITDA
135.0
 
 
Liquidity
RCF Commitments
60.0
 
Other Liquidity
75.0
 
Plus: Cash and Equivalents
15.0
 
Total Liquidity
150.0
 
Credit Metrics
Gross Leverage
4.5x
 
Net Leverage
4.4x
 

Notes:
The capital structure in on a post-IFRS 16 basis. LTM reported EBITDA refers to FY'21 structuring EBITDA as reported, calculated as €80M Optigroup FY'21 reported EBITDA (post-IFRS 16) plus €34M Hygos FY'21 reported EBITDA (post-IFRS 16) plus €9M management, KPMG and VDD adjustments, and €12M synergies. Other liquidity refers to €75M delayed draw term loan.
Pro Forma: The capital structure is pro forma for the May 2022 transaction.

– Beatrice Mavroleon
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