Verallia : Verallia A possible IPO in the near future?

Publication date 07/08/2017 - Writing date : 04/08/2017 - - - - - - - - - - - - - - - - - - - - Following the appointment of the new CEO and Verallia's solid results in H1 2017, we are reviewing here a possible exit by shareholders in the medium term and its impact on Verallia’s debt. - >H1 2017 was marked by the release of solid results and the appointment of a new CEO - In H1 2017, Verallia reported sales of € 1.25bn, up 5.8%. EBITDA stood at € 246m, i.e. a 9.4% increase (margin up +65pb to 19.7%). The group also announced the appointment of Michel Giannuzzi as CEO of the group from 1 September 2017. Between 2007 and 2017, he was Chairman of the Board of Tarkett, who launched the IPO in 2013. His appointment at the helm of Verallia may lead to an IPO of the company, a plan that management mentioned at the company’s conference call on Q2 2017 results.Apollo, Verallia’s majority shareholder, may consider an exit through an IPO or a sale to an industrial buyer - Apollo, which holds a 90% stake in Verallia since 2015 alongside Bpifrance (10% stake), may consider selling all or part of its stake in the near future. Verallia has recorded excellent sales and earnings growth following its takeover (+2% for sales and +14% for EBITDA). Credit metrics have nonetheless been affected by bond issues to finance shareholder returns over the past two years. In these conditions, an IPO would trim the company’s debt, since it would be obliged to redeem the PIK Toggle notes, even in the absence of a capital increase. The group could obtain a better rating in this scenario and refinance its bond debt to: 1/ lower interest expense; 2/ extend debt maturities; and 3/ renegotiate covenants. A small capital increase could also be considered to cut debt further. However, we think that the company will wait until 2018, closer to the first call date, before launching such a fundraising in a bid to minimise the redemption premium. The sale of the entire company to an industrial buyer, which would probably refinance all the debt, is another option that could be considered by shareholders, but this scenario does not appear to be the most plausible scenario to us. We are upgrading our credit opinion from Stable to Positive, maintaining our Neutral recommendation on the 5.125% 22 bonds and raising our recommendation to Buy on the 7.250% 2023 and PIK 8.25% 2022 notes - The 5.125% 22 bonds have a lower yield today than their peers (1.0% vs. average of 2.1%). As the market already anticipates their redemption at the first call date, a potential IPO would have little impact on its yield. In contrast, the 7.250% 2023 paper offers a yield in line with similar bonds (2.9%), which is attractive as part of porting logic and this could improve in the event of refinancing the first call date (3.4%). That said, we prefer the PIK 8.250% 2022 notes which offer a yield of 4.0% today, which could rise sharply in case of a redemption after an IPO (7.4% if it takes place in spring 2018 and 5.2% in September).