Selecta - Valuation and Recap Model
All,
Please find our updated model here.
Selecta has always been good for disappointment. To be fair, we tried to overlook the warning signs that intensified in Q2, concentrating on that would-be a great driver of Opympics and Football on which the company would refinance again. Alas, the reverse has been the case and it’s all gone the other way now. If we were KKR, we would display great reluctance to invest further cash to see creditors fall in line first. We might then still be tempted to buy an option for a little cash, but we can almost hear the debate involving “throwing good money after bad” and the cash contribution would have to be minuscule.
Investment Rationale:
- We recently sold (dumped) our Prefs at a painful loss for 12c/€ as soon as the first bids were indicated - and then well below those. Instead of posting stellar Q2 figures on which we could have held constructive refinancing discussions with KKR (would have always needed some €50m of fresh cash), the company disappointed heavily with sales dropping in a very challenging consumer environment and no Olympic or Euro 2024 football relief in sight. Selecta also posted disappointing Trading Revenue in the same quarter, which seems at best an odd coincidence. We assume unaffected Trading Revenues going forward. Management stated that the performance of the company would be unlikely to improve in the short-to-medium term, which - again - seemed a consciously planted statement from a team that has become known as delivering uber-confident presentations.
- In the table above we summarise everyone's negotiating position in the upcoming LME / restructuring.
How much fresh cash?
- Our recap model (below) suggests that €50m should suffice, if the RCF can be cleaned down and the exposure frozen as super sr Term Loan. The RCF could be smaller going forward.
- The table also shows that whoever puts in €50m would buy themselves a good 1/3 of future equity (if the 2LNs equitise €100m). This could be KKR (receive over 50% if valuation below 7x EBITDA) or it could be the creditors, who together with various equitisations would receive close to 90% at 7x, if we leave 5.5x leverage on the balance sheet.
- The restructuring has to leave the balance sheet deleveraged and has to respect the integrity of the 1LNs, as a subgroup has sought separate advice. We have assumed two consecutive rounds of equitisations, in line with current capital structure layers and fresh cash needs.
Underperformance:
- As Europe goes through something between stagnation and recession - however calculated - consumer sentiment and disposable income leave Selecta highly exposed.
- The bet in 2020 that revenues and margins would recover post Pandemic did not materialise as many customers continued to wfh. Efficiency gains from culling the machine fleet, while being the right strategy, have not been sufficient to offset that.
- Awkwardly perhaps, the Q3 slump in performance coincided with a marked drop in Coffee Trading Revenues. We are assuming regular Trading revenues going forward.
Looking forward to discussing the name with you,
Wolfgang