|The acquisition of Naked Wines, the international online wine business, represents the sort of radical thinking we were hoping would come out of the strategic review and gives Majestic growth opportunities beyond the UK. Rowan Gormley, CEO of Naked Wine, is appointed Group CEO. Both businesses have much to gain from each other. We expect Mr Gormley to look to unlock Majestic’s online potential, improve its CRM, leverage its store network distribution and moderate store roll out plans. Upgrade to BUY.|
- Naked Wines: acquiring a complementary business at an attractive price. Key terms of the deal: £70m consideration, split £50m cash up-front, £20m deferred in shares, valuing Naked Wines on 0.9x Sales.
- Naked Wines is an international business (60% UK) generating c. £80m of sales Y/E Mar-15 with EBITDA losses of c.£2m, after new customer acquisition spend of c. £5m. It is profitable in the UK (c. £2m), and expected to break-even in FY16 as the profitability of maturing customers delivers P&L leverage.
- Deal beneficial to Majestic through: 1) a CEO with a background in brands & customer service, 2) accelerating change in a lagging online & CRM proposition, and 3) accessing more wines to aid the trade / B2B segment.
- Current trading update reports LFL +1.5% for Q4. However a weak March, severance payments and FX movements means we cut FY15e PBT by £1m/4.5%. Transformative deal means EBIT/EBITDA forecasts in FY17e rise by 4% & 6% respectively, but increased interest charges and share dilution impact EPS forecasts, (FY17e -7.7%).
- Financing the deal through debt (1.7x pro-forma ND/EBITDA) means no cash dividend payments in FY16 (i.e. no final FY15 / interim FY16 dividend), before moving back towards normal dividend payments in FY17/18.
- A positive shift in stance as prospects for the core UK business are improved in addition to a capital light route into international markets. BUY