Selecta Group B.V : It is not a rabbit... it’s (a) Pelican Rouge; KKR provides new capital for acquisition; we maintain Neutral recommendation, ‘B’/Stable credit opinion

In our 8 March 2017 update, we noted that the company’s failure to provide revenue and EBITDA guidance for the announced Lavazza project “...makes it harder for us to decide if this project has real potential or is just a rabbit being pulled out of a hat.” The announced acquisition of Pelican Rouge Group. B.V. (Pelican Rouge) is no magic trick, but Selecta’s attempt to create a leading vending and coffee services provider. - The new group will operate 327,000 machines (incl. 195,000 from Pelican Rouge) in 15 markets and generate pro-forma revenue of € 1.3bn and adj. EBITDA of € 222m. This figure includes Selecta and Pelican Rouge EBITDA adjustments and assumes full achievement of cost synergies targeted by Selecta of € 35m (2.7% of pro forma group revenue) to be realised on the back of a meaningful market overlap (eight markets), increasing market density and purchasing savings, among other. € 1.3bn sales would equate to market share of 9% based on the European Vending Association’s industry revenue figure; this share would be almost 4x the next pure play vending machine operator Italian IVS Group. Selecta calculated that the pro-forma senior secured leverage does not require bondholders’ consent. Management sees no antitrust concerns and expects to close the transaction by mid-/end-June 2017. - Selecta’s subsidiary Selecta AG will acquire 100% of Pelican Rouge’s share capital, financed by the rollover of € 375m Pelican Rouge debt (debt swapped into new Selecta loans; cash component: E+400bp; PIK: 0-300bp phased in over the next three years; pari passu with the senior secured notes; 0.5% floor applicable) and an injection of € 180m of new capital by Selecta’s 100% shareholder KKR (likely PIK debt on Selecta Group S.a r.l pushed down to Selecta Group B.V. as hard equity, we understand). This was crucial for the initiation of this transaction as a Selecta/Pelican Rouge merger had been rumoured often in the past but never materialised because no party had sufficient firepower. These funding sources finance the enterprise value (€ 499m), transaction fees (€ 15m), integration costs (€ 14m) and a one-off tax claim against Pelican Rouge in the Netherlands (€ 27m). We also understood that KKR will underwrite an increase of the existing super senior RCF from € 50m (almost fully drawn at end-December 2016) to € 100m. The new € 50m commitment will remain undrawn at closing, improving its liquidity backup. - Credit Opinion: The € and CHF-denominated bond tranches currently trade at mid-yields of 6.3% (8.0% pre-acquisition) and 6.7% (8.6%). The new group’s pro-forma leverage (Oddo def.) declines to 7.8x from 8.1x Selecta standalone (Oddo def.) at end-Dec 2016, and to 5.9x including Selecta-defined adjustments and synergies. We assume that Pelican Rouge’s operating leases (still undisclosed) will result in higher leverage. On a pro-forma basis we still derive a ‘B’/Stable rating, as recently affirmed. - Recommendation: We maintain our Neutral rating (changed from Buy on 8 March 2017). For more details please see “view and recommendation”. Prices above par should in our view be considered as a chance to reduce positions. We may recommend selling the instrument if we see no real operational improvements in coming quarters – a prerequisite for a successful refinancing. We maintain our view that Selecta is not a hold to maturity investment for the time being. - >