By Vincent Wess (WHU – Otto Beisheim School of Management) - Date: 22/09/2019
Acquirer: EssilorLuxottica (ENXTPA:EL)
Target: GrandVision (ENXTAM:GVNV)
Estimated value: USD 7.1bn (Total Equity Value)
Announcement date: 31/07/2019
Acquirer Advisors: BNP Paribas, Citi, Goldman Sachs
Target Advisors: ING
Overview of the deal
Challenged by the omnipresence of and shifting consumer behaviour towards e-commerce and other web- or app-based retail solutions, consumer retail companies are facing increased pressure to redefine their positioning in the market place by offering omnichannel solutions to customers and reinventing the in-store experience. EssilorLuxottica acquiring GrandVision, the optical retail chain in the Netherlands and internationally, is a prime example underlining the shift of consumer retailers towards multichannel retail strategies and the creation of increasingly global brands with larger scale.
Through this acquisition, EssilorLuxottica will expand its optical retail platform, specifically in Europe by adding more than 7,200 stores globally as well as c. 37,00 employees and EUR 3.7bn in total annual revenues. The combination of GrandVision's expertise in the direct-to- consumer business and EssilorLuxottica's outstanding product innovation and manufacturing capabilities will position the combined entity to capture the significant growth potential of the eyewear and eyecare industry.
”Furthermore, it will create a truly global eyecare and eyewear company that is ideally positioned to capture changing consumer needs and behaviors, and provide its customers with a high quality optical omni-channel customer experience.” - Stephan Borchert, CEO of GrandVision
Company Details (EssilorLuxottica)
Founded in 1849, Essilor’s long history follows its main strategic focus to improve sight for as many people as possible. Back in 1961, Luxottica is determined to shift the prevalent consumer perception of glasses away from an unexciting device towards a desirable vehicle for self-expression. The firm has developed into a vertically integrated player which operates along the entire value chain from design to end consumers and the ability to offer real-time monitoring of the functionality of products as well as processes.
Created in 2018, EssilorLuxottica is an entity combining two complementary business stories one in advanced lens technologies and the other in the craftsmanship of eyewear. As of today, the firm has c. 150,000 employees and more than 10,000 stores globally.
- Created in 2018, headquartered in Charenton-le-Pont, France
- President and CEO: Hubert Sagnières
- Number of employees: c.150,000
- Market Cap: EUR 56,101m - EV: EUR 58,014m
- LTM Revenue: EUR 16,953m - LTM EBITDA: EUR 4,471m
- LTM EV/Revenue: 3.4x - LTM EV/EBITDA: 13.0x
Company Details (GrandVision)
GrandVision N.V., together with its subsidiaries, operates optical retail chains in the Netherlands and internationally. The company offers a range of optical services; prescription glasses, including frames and lenses; contact lenses; care products; and sunglasses comprising plain and with prescription lenses. It operates under 30 retail banners. As of February 27, 2019, the company operated approximately 7,095 optical retail stores. It also provides eye testing, examinations, and diagnostics services. The company was founded in 1891 and is headquartered in Schiphol, the Netherlands. GrandVision N.V. is a subsidiary of HAL Optical Investments B.V. which currently owns 76.72% of GrandVision.
- President and CEO: Stephan Borchert
- Number of employees: c. 37,000
- Market Cap: EUR 6,909.5m - EV: EUR 9,199.3m
- LTM Revenue: EUR 3,842.1m - LTM EBITDA: EUR 575.6m
- LTM EV/Revenue: 2.4x - LTM EV/EBITDA: 16.0x
Deal Structure & Mechanics
EssilorLuxottica will acquire the 76.72% currently owned by HAL Optical Investments B.V. at a cash purchase price equal to EUR 28.00 per share (to be increased by 1.5% to EUR 28.42 if the closing of the transactions does not occur within 12 months from the announcement date). Following the closing of the transaction with HAL Optical Investments B.V., Essilor Luxottica launches a Mandatory Public Offer for all outstanding shares of GrandVision, where the price of the Mandatory Public Offer will be determined according to Dutch law but will be at a minimum the price per share paid to HAL pursuant to the successful completion of the first component of the transaction.
The purchase price of EUR 28.00 represents a premium of 33.1% to GrandVisions' closing price on July 16, 2019 of EUR 21.04 and a 41.7% premium to GrandVision's average volume weighted price for the three month period up to and including July 16, 2019 of EUR 19.77.
Projections and Assumptions
Following the combination of the two businesses, the combined entity will follow a clear multichannel and multibrand strategy with GrandVision operating EssilorLuxottica's ophthalmic retail activities in Europe, the Middle East and Africa, while EssilorLuxottica is in charge of operations for the retail networks in Latin America and North America.
According to EssilorLuxottica executives, the rationale of the transaction is not based on cost synergies, with no reduction of the workforce planned post-integration and no significant redundancies as a result of the merger identified yet.
The combined entity will immediately benefit from the complementary nature of the two businesses, both from a geographic and operational standpoint. EssilorLuxottica strengthens its geographic footprint in Europe and Latin America by adding GrandVisions 7,200 stores and online platforms in more than 40 countries. By adding more than 150 million active customers to the combined pool of customers, the combined entity benefits immediately from the ability to leverage EssilorLuxottica's multibrand and multiproduct solutions as well as its state-of-the-art supply chain and integrated IT systems across a significantly larger customer base. Additionally, GrandVision's 125 years of experience in the direct-to-consumer business and in putting the customer at the center of operational activities, allows EssilorLuxottica to drive customer engagement and in-store experience in its own stores in the form of more regular eye exams, up-to-date prescriptions and increased availability of multiple tailored vision care products to meet the individual vision and style needs of consumers. Increased customer engagement predominantly driven by GrandVisions expertise and human capital will be beneficial to customer satisfaction, order frequency rates, as well as average basket size and, will thus contribute to the combined entity's revenue growth shortly after the integration.
Following the combination and integration of the two businesses, the combined entity will drive revenue and profits by efficiency gains on the one side and by business expansion on the other side. New store openings, as well as investments in store maintenance and renovation, will not only drive revenues directly by a larger presence in key markets and an increased sales force but also indirectly by an overall higher-quality in-store experience for customers, especially relative to key competitors. New store openings in existing markets with already developed supply-chains, logistics, IT-systems and access to a global platform with a multiproduct and multi-brand approach will improve the efficiency of the planned revenue growth and also results in a key competitive advantage for the combined entity relative to smaller, less globally active players. Quickly changing customer demands and increased pressure from pure online retailers in the eyewear and eyecare space further validate the planned merger as the combined entity can respond more efficiently to changing customer demands in terms of style and purchasing channel.
Risks and uncertainties
Due to the high degree of complementarity of the two businesses and its significant customer base and market share in the eyewear and eyecare space globally, the approval from the various antitrust authorities could prove to be problematic. Necessary actions to guarantee merger clearance could lead to a reduction of the upside and weaken key components of the strategic rationale for the merger, related to scale and geographic expansion as both companies have significant market shares in France and Belgium. This results in a below- average probability of success for the merger to pass the scrutiny of antitrust regulators.
As consumers increasingly turn to their digital devices to order stylish, fairly priced and individualized eyewear in a convenient way, boosting the retail store base by 7,200 stores globally could prove equally difficult. With technological advancements in facial recognition and digital tools to analyze vision needs, the need to visit eyewear retail stores might diminish in the long-run, thus reducing the need to add more stores and human capital to the business model.
The premium paid by EssilorLuxottica for GrandVision is another reason for potential concern. The EUR 28.00 paid per share represents a hefty 41.7% premium to GrandVision's average volume weighted price for the three month period up to and including July 16, 2019 of 19.77. However, given that the share price of GrandVision is almost the EUR 28.00 offered by EssilorLuxottica and therefore already incorporates the control premium offered in the acquisition the valuation of GrandVision seems to be less high when compared with a set of reasonably selected peers showing an average EV/EBITDA multiple of 14.2x and an average EV/Revenue of 2.1x.
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