Spicers sale update

Yesterday's news that the sale of Spicers has been agreed ends several months of speculation surrounding the future of the European wholesaler.

A closer look at yesterday’s announcement that an agreement has been reached to acquire leading European wholesaler Spicers

Yesterday’s news that the sale of Spicers has been agreed ends several months of speculation surrounding the future of the European wholesaler.

Parent company DS Smith had said last December that Spicers was not a core business in its strategy to become a leading player in the European recycled packaging market.

OPI predicted in March that ambitious Spanish wholesaler Unipapel could be interested in acquiring the continental European operations of Spicers and that has turned out to be the case with its binding offer to DS Smith.

Unipapel has agreed to acquire the entire Spicers business for a total of £200 million ($320 million), some £50 million more than analysts had recently been suggesting.

However, the Spanish firm will immediately recoup £32 million of that after it was revealed that it had entered into a binding agreement – conditional on the DS Smith transaction being finalised – with UK-based investment fund BECAP for Spicers’ UK & Ireland division.

For Unipapel, that leaves a transaction price of around €186 million ($267 million) which the firm will fund from a combination of its own cash reserves and a €145 million syndicated loan involving a number of banks.

As it stands, nothing is yet finalised. Unipapel’s acquisition of the whole of Spicers is dependent upon the outcome of works council negotiations in France. As that country generally runs at half speed in July and basically shuts down during the month of August, it is unclear how long those negotiations will take. Of course, the UK transaction is contingent upon Unipapel’s acquisition going through.

Confident

Unipapel’s CEO Mill´n ´lvarez-Miranda was confident that works council talks would go smoothly given the firm’s growth ambitions.

“We do not envisage at this time the need to do an integration of the business,” he stated. “Our plan would be to run Spicers as an independent business. We have learned in Spain from running Adimpo and Unipapel in parallel that there are a lot of synergies that can be driven without having to integrate two businesses into one.”

´lvarez-Miranda cited the success of Unipapel’s operations in Spain, which have seen an impressive 40% growth so far this year.

The deal also has to be approved by EU anti-trust authorities, but that should be a formality, and it has been suggested that everything could be finalised as early as September. DS Smith put a conservative last-stop date of December for closing, but said that it could well be before that.

The addition of Spicers’ continental operations – France, Benelux, Germany, Italy and Spain – will bring Unipapel’s annual sales to around €1.3 billion, cementing its position as the leading office and IT supplies wholesaler in Europe. About two-thirds of those sales will come from IT hardware and accessories (following the acquisition of Adimpo in 2009) and the remaining third from traditional office supplies.

“If the acquisition comes to fruition there will be a much better balance to our product portfolio,” said ´lvarez-Miranda.

There will be a better geographical balance too, with over 60% of sales outside its domestic Spanish market.

France will become a key market for Unipapel. ´lvarez-Miranda said that Adimpo has been growing at a healthy clip this year in France (its 2010 sales were €180 million) and that adding the French Spicers business – which he described as the “jewel in the crown” of Spicers’ European operations – would make a very powerful combination.

The Unipapel CEO committed to maintaining the recent strategy of expanding the Spicers Calipage brand which is currently being rolled out in Germany.

The only market where this may be affected is Spain, where the company already operates a similar franchise arrangement with its Unipapel and UniStar brands. Therefore it may make sense to bring these businesses – Calipage has more than 100 dealers in Spain – into the same fold.

´lvarez-Miranda stressed that Unipapel is interested in Spicers as a package. This includes current management and staff and its distribution infrastructure of 12 DCs.

“The story is one of growth. We’ve gone from €200 million in 2008 to possibly €1.3 billion in 2012, and at the end of day everything is about people.”

´lvarez-Miranda wouldn’t comment on Unipapel’s membership of the European purchasing alliance EOSA, but it seems unlikely that the company would remain in the group beyond the end of the year. That would, once again, raise questions about the longevity of the EOSA model and leave it without members in the key markets of the UK, France and Spain.

Sleeping giant

The man behind the BECAP deal for the UK & Ireland business is none other than Ray Peck, the man who led the private equity buyout/management buy-in of leading UK reseller Banner in 2001, heralding a transformation of the business that saw it taken public as o2o three years later.

Peck admitted that he was unable to reveal too many details at this stage, but said that his original goal when Spicers became available late last year had been to put together a deal for the whole of the business. When this proved unfeasible, he was drawn to Unipapel which itself had already expressed an interest in Spicers as part of its own European growth plans.

OPI understands that Peck will take on an Executive Director role in the new business and that the existing UK & Ireland management team – some of whom may also have financial interests in the company – have the backing of BECAP and will remain with the company.

Business as usual

In a letter to customers, UK & Ireland Managing Director Alan Ball said that it would be “business as usual”, adding that the company was “well-funded”. BECAP has said that it has committed £40 million to a wholly-owned special purpose vehicle set up to effect the transaction.

It will be interesting to see if the UK & Ireland and continental Europe businesses maintain links when the deal goes through as expected.

It would seem good business sense to maintain certain synergies, notably with its 5-Star private label brand and pan-European vendor agreements. The UK and Italian businesses have also worked together to encourage the European roll-out of online reseller Euroffice.

In fact, OPI understands that an agreement may already be in place to ensure that every effort is made to leverage these existing synergies.

Question marks

There are, of course a few remaining unanswered questions surrounding the final make-up of a restructured Spicers.

Question marks must surely hang over the European purchasing and marketing team and of the role of Group CEO Peter Damman who was brought in earlier this year to drive through improvements in the Spicers business.

Damman refused to speculate about his own future, saying that his focus is to hold the appropriate consultations with the works councils and to continue to drive benefits through the business.

There may be an executive management position in the continental business, depending on how Unipapel decides to structure things. Whether that would interest Damman is another matter. Another person in the frame if such a position were to come up would surely be Jean-Yves Sebaoun who was given the role of COO a few months ago, but who still has overall responsibility for Spicers France.

Win-win-win

At this early stage after the announcement, it is definitely a transaction that suits the three parties involved.

DS Smith has offloaded a non-core business that will allow it to focus on its main recycled packaging business, perhaps for a higher price than it had previously expected.

Unipapel certainly doesn’t believe that it has paid over the odds. The price it paid for the continental operations represents an EBITDA multiple of just 5.4, while it sold the UK & Ireland business for an EBITDA multiple of 17. Clearly, it will be able to achieve synergies in its key markets.

For BECAP and Ray Peck, they have picked up a £350 million business for just over £30 million. Sure, there are profitability issues at the moment, but Peck has been there and done it before with Banner and, with the senior management team and a strategy already in place, you wouldn’t bet against him doing it again.