Dufry to Acquire Travel Retailer Nuance for $1.7 Billion

Dufry AG agreed to buy Nuance Group for about $1.7 billion, unifying the Swiss duty-free store operators and securing growth in the Mediterranean, the world’s largest travel destination.

Dufry shares rose as much as 7.9 percent, the steepest intraday gain since January 2012, after the Basel, Switzerland-based company announced its biggest-ever purchase and said the deal will boost earnings next year. The acquisition creates a business with annual sales exceeding $6 billion.

“With this transaction, Dufry becomes the clear leader in the global travel retail industry,” said Rene Weber, an analyst at Bank Vontobel who recommends buying Dufry shares. The purchase is a “great geographical fit.”

Global spending by travelers is set to increase as more middle-class consumers in China go abroad and wealthy Chinese splurge overseas amid a crackdown on lavish spending at home, Exane BNP Paribas said last month. Nearly 40 percent of luxury spending is done by tourists and Chinese consumers account for almost 30 percent of the total spent abroad, according to Exane.

Zurich-based Nuance, owned by PAI Partners and Gecos SpA, operates about 360 stores and had sales of 2.1 billion Swiss francs ($2.3 billion) last year. Dufry has about 1,400 shops and generated revenue of 3.6 billion francs in 2013.

The shares rose as much as 11.50 francs to 157.20 francs and traded at 157.10 francs as of 11:36 a.m. in Zurich.

‘Transformational Deal’

Nuance, which generates nearly half of its revenue in Europe, the Middle East and Africa, has stores in 20 countries, operating about 75,000 square meters (807,000 square feet) of retail space. The company, which had adjusted earnings before interest, taxes, depreciation and amortization of about 156 million francs last year, was reported to be considering an initial public offering as recently as April.

Dufry Chief Executive Officer Julian Diaz has expanded the Swiss travel retailer through more than a dozen acquisitions in the past decade, purchasing the Hudson News chain in 2008 and building a network of more than 1,350 shops in airports, cruise liners, ports and other tourist destinations.

Today’s purchase is a “transformational deal not only for Dufry, but also for the travel-retail industry,” Diaz said in the statement. The two businesses had a combined market share of 15 percent in airport travel retail last year, Dufry said.

The acquisition will pit the enlarged company against DFS Group in Europe. DFS, the duty-free operator controlled by LVMH Moet Hennessy Louis Vuitton SA, plans to open its first stores in the region in 2016 to cater to Chinese consumers, Chief Operating Officer Michael Schriver said in October. DFS gets more than half of its global sales from Chinese shoppers.

Rights Offering

The 1.55 billion-franc price implies an enterprise value of

9.9 times earnings before interest, taxes, depreciation and amortization, excluding Nuance’s Australian business, whose main concessions expire next year. Including projected annual cost savings of 70 million francs, the ratio is 6.9, Dufry said. The company paid a multiple of 9.8 for Hudson News and Autogrill SpA paid 14.5 times for World Duty Free, according to Dufry.

“The price is attractive, even without the expected synergies it’s about what Dufry has paid for other acquisitions,” said Marco Strittmatter, an analyst at Zuercher Kantonalbank AG who has the equivalent of a hold recommendation on the stock. “It was a surprise as it had been rumored that Nuance would have an IPO later this year. Nuance would have made a good competitor for Dufry on the market.”

The acquisition will be funded through a 1 billion-franc rights offering and the remainder with debt.

Dufry said it expects to complete the purchase in the third quarter and AT Kearney was an adviser on the deal. The company will give the terms of the capital increase June 26, when it seeks approval at a shareholder meeting.

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