– Darty plc (DRTY LN) / Groupe Fnac SA (FNAC FP): Although Darty/FNAC represents a smaller deal with lower liquidity (trades average around $0.5m), we believe this situation has been slightly overlooked, and we consider the spread at more than 10% attractive to set up (spread has already tightened significantly since we highlighted the existence of the situation/wide spread) . 

Given main risk relates to timing risk on French competition approval, we would look to set up the spread above Gbp 11 (terms: 1 DRTY = 0.027 FNAC) or about 12% annualised on worse case end of 2016 closing, as this is a stringent UK governed Scheme without any issues with shareholder approvals or substantial regulatory blocking risk, while there is presence of timing upside should France clear the deal in Phase 1 (should parties willing to dispose of limited number of stores in Paris to avoid a lengthier Phase 2).

Next news flow will come from regulatory filings in France and Belgium: FNAC IR confirmed that pre-notification talks started with French regulator just before Christmas and that a formal filing is expected mid-February (with French Phase 1 clearance or Phase 2 launch set for early April). 

On 20 November 2016, FNAC announced a recommended transaction to acquire Darty plc where Darty shareholders are offered 1 Fnac share for 37 Darty shares or 1 DRTY = 0.027 FNAC with a partial cash alternative for up to €95m, representing 12% of Darty’s offer valuation of GBP 600m (based on share offer value of price of 113.5p, based on Fnac’s current  €55.5 share price). Darty shareholders also remain entitled to further dividends: 2016 interim dividend of max 0.875 euro cents going ex on 4 March 2016 and potentially additional 2016 final dividend of max 2.625 euro cents going ex 21 October 2016. There is no dividend leakage on FNAC’s side as FNAC told us they don’t expect any dividend payout till  the Darty deal/strategic re-organization has been finalised.

Deal is structured as pre-conditional UK Scheme where firstly deal will need to get anti-trust clearance from the French Competition Authority and the Belgian Competition Authority (or, if relevant, the European Commission) before first  FNAC and then Darty shareholders will need to approve the deal. Depending on potential extended regulatory timetables, deal will either close mid-2016 or Q4 2016.

Main angle is related to regulatory condition as we believe shareholder approvals from both sides should be pretty straightforward: i) Darty’s implied 30%+ premium with shareholder irrevocables already from 23.63% of the issued share capital of Darty including 1st and 3rd largest shareholders Knight Vinke and DNCA Finance; and ii) strong financial and strategic rationale for FNAC shareholders witnessed by FNAC’s 13% outperformance vs CAC40 since end-Sep-15 (and nod of support of FNAC’s largest 39% shareholder, Artemis, Pinault’s family office vehicle).

Although tie up meets EC notification threshold, given that Darty and FNAC have respectively 80% and 70%+ of their total EC turnover coming from France (Darty about EUR 2.8bn in revenues in France out of its EUR 3.5bn EC turnover and FNAC about EUR 2.8bn in revenues in France out of its EUR 3.7bn EC turnover), deal will go to France and Belgium for review rather than EC. Given that companies indicated that they will need about 3 months before formal filings, we expect Belgian and French competition filings in next 2-4 weeks: 

FRANCE: We assess at worse timing risk related to French competition approval: we would estimate a 50-60% chance for Phase 1 approval (possibly with some store divestments in some French large metropolitan areas like Paris) and 40-50% chance for extended 130 td Phase 2 (although FNAC IR mentioned to us that a Phase 2 in France could only last 6 weeks): Although FNAC’s focus in France is mainly related to editorial products (books, DVDs,…), a market where Darty is not present in, there is overlap on both companies’ electrical/electronics retailing: on headline market share, combined company might be controlling more than 30% of French electrical/electronics retail market (Fnac had a market share of 12-14% in consumer electronics while Darty had a 17% market share in electronics in France). However, we cannot see any substantial blocking risk given a) Darty’s exposure is heavily weighted towards white goods (large and small sized domestic appliances) which represent 50% of Darty’s electrics revenues while FNAC has no exposure to that segment; b) argument for excruciating emerging online competition for the overlapping brown and grey products segments. However given that both companies are heavily Paris skewed (38 out of Fnac’s total 103 stores in France are in Paris while about 75 out of Darty’s total 222 stores are in Paris), most likely that a limited number of stores need to be divested there.

BELGIUM: This should receive straightforward Phase 1 clearance as there are nantitrust issues as Darty has 10.7% market share in general market for electrical goods while FNAC’s market share for editorial products is around 10.5% and 3.4% for consumer electronics in Belgium. Hence, tie up is largely complementary with FNAC more focused on editorial products vs Darty more on (white goods) electrical products.