Iceland - Brait exiting, management acquire 100% with other people's money

All,

Iceland have announced that management of Iceland Group have bought out Brait’s equity stake in Iceland Group.  Brait had 60% economic interest but management always had majority of voting shares.

This is not a great deal for Brait, after investing £256m for their stake in 2012, are receiving £115m in instalments over the next coming years.  The deal is structured with Brait receiving £60m now, (8th June 2020) and the remaining split between £27m in July 2021 and £28m in July 2022 (Deferred Payments).  

The deal has been funded by a loan from Iceland Foods to a NewCo, effectively dividend-ing the money out of Bondholder Group.   This has been funded via the available restricted payment capacity, and these baskets have sufficient capacity for the above deferred payments. 

To reassure bondholders, the Company have released some leverage stats, stating its leverage ratio post the £60m payment to Brait, is below the ratio as at year end (27th March 2020 - not yet reported but we expect it to be 5.1x) and below the ratio as at the same point 12 months ago (it is ambiguous if this refers to March-19 or leverage in June-19)  (March-19 was 5.0x and June-19 5.2x).   Given the Company has £760m of bonds outstanding, £20m Super senior Facility and c. £60m on balance sheet leases, with net cash of c. £140m, would imply an EBITDA in excess of £140m.  (£840m Gross Debt, £700m net debt, 5.0x equates to £140m EBITDA) 

It also confirms cash balance, post payment to Brait, is £140m.  This cash balance is significantly in excess of what we expected in our model.  A pro-rata cash balance would be £180m (£140m plus £60m payment to Brait, less the new £20m super senior facility), which is c. £55m higher than our model.  This is not explained by reduction in CAPEX which accounts for c. £20m CAPEX in Q419 & Q120. We expect working capital to be further stretched.  

Conclusion:

The exit of Brait removes any uncertainty around the name, and the glimpses of recent trading confirm our positive outlook on the name, the management has leveraged up c.1.0x to gain 100% control of the Group.  Management have not funded this buyout with their own money, instead leveraging up the Group to complete this transaction.  

Release of Q42020 numbers are due on 24th June 2020, with call at 1pm.

Any questions please do not hesitate to call.

Tomas