World Duty Free and its main 50% shareholder, the Benetton family, are in a very public and well flagged sale process trying to find a buyer for World Duty Free– a sale process (that looks to have been kicked
off since late 2014) seems to be accelerating now with 3 remaining bidders in the process, namely Swiss Dufry, the South-Korean Lotte and Sunrise Duty Free, the Chinese group controlled by the fund Boyu
Capital.

Although Dufry Group would be the most natural buyer for WDF, any 100% cash acquisition would dramatically breach its debt covenants: with however Qatar Investment Authority having come in the picture as a potential equity partner for Dufry in the last couple of days and Benetton looking for clean cash exit from WDF, it looks (should a sale materialize) like base case sale outcome would be a 100% cash
acquisition of Benetton’s 50% stake by Dufry/Qatar group, followed by an Italian mandatory offer for the minorities.

However main risk to deal materializing is related to bid-ask with Benetton family: given Benetton family is in NO rush to sell and would probably only be interested in high premium cash bids, current WDF price looks to have run a bit ahead of itself, with very few scenarios where bidders could justify too much higher offer pricing than where WDF is currently trading at EUR 11.05 with respect to:

a)      Premiums: current share price already reflects premia of 30-50% to where WDF was trading before news of potential sale by Benetton family

b)      Exit Valuations: WDF is currently trading at more than 15x NTM EBITDA vs Dufry’s most recent acquisitions done  at EV/EBITDA multiples of 9.9x (Nuance) and 8.9x (Hellenic Duty Free), within an
8.9x-14.5x historical range of transactions in the industry compiled by Dufry. Legacy Autogrill transactions that formed World Duty Free in its current form were conducted at 10.4x (Aldeasa) and 14.5x (World
Duty Free).

c)       Synergies: Any trade buyer like Dufry could probably be in line with about 3 % of target sales – which could be worth about EUR 3-4 per share on top of standalone EUR 8, tie up between Dufry and WDF
might potentially have less scope for synergies as  a) Dufry and WDF are already boasting best-in-class gross margins of respectively 58.7% and 59.2%; and b) WDF and Dufry have no significant overlap in central costs or operations

Although we believe in the base case that a deal will materialize between WDF and Dufry/QIA in the next couple of weeks, this is not one to chase given a) there might be still some bid-ask deal risk with Benetton family; and b)  very hard to justify very high premium bid pricing vs current WDF share pricing.