Hubert Sagnières, the former chief executive of Essilor of America who is being promoted from chief operating officer to CEO of the whole group on Jan. 1, had several explanations for Essilor International's rather unexpected diversification into readers through its acquisition of FGX International, the North American leader in this fast-growing sector. The planned merger deal is subject to regulatory approval and to the subsequent endorsement by shareholders representing at least 50.1 percent of the equity, up from 32-33 percent at present.
The central idea behind the move is to create a new division of the French group, based at FGX' headquarters in Rhode Island, that will provide low-cost «visual solutions» for current users who want a second pair of glasses and for some of the 2.4 billion people around the world who see and read poorly but are unable or unwilling to adopt the more sophisticated products offered by Essilor and its subsidiaries.
Sagnières, who recently hinted at the enormous potential offered by this untapped market, feels that readers such as those of FGX can serve as a step-up to more advanced vision correction solutions. He indicated that Essilor can also be of help to improve FGX' product line, which also consists of sunglasses and sun clips, through its know-how in lenses, materials and coatings.
Selling for about $5 a pair at wholesale or $15 at retail, readers represent 54 percent of FGX' sales, and they are distributed mostly in the U.S. Only 13 percent of FGX' turnover is generated outside the U.S. ? mostly in Canada, Mexico and the U.K. ? and Essilor's massive global presence can help FGX to expand in Europe, Asia and other parts of the world.
In fact, FGX is seen as a platform for acquisitions of similar specialists in other countries, with their own sales networks, who have an annual turnover of only up to $25 million and can benefit from FGX' strong supply chain, essentially consisting of seven subcontractors in China. The global market for readers is estimated at 200 million pairs and has been growing at an estimated annual rate of between 4 and 8 percent, more than twice faster than the regular ophthalmic market. They represent around 8 percent of the total market and they appeal to customers' demands for low prices and convenience.
FGX sells 70 million pairs of glasses a year but has a global market share of only 17 percent in readers. About 33 percent of its revenues, which reached $256 million in 2008, consist of sunglasses. Most of its products are sold under own brands such as Foster Grant, Magnivision, Angel, Gargoyles, Anarchy, SolarShied, PolarEyes and Corinne McCormack. It also holds licenses such as Ironman, Levi Strauss Signature, Body Glove and C9 by Champion.
One benefit of the acquisition is that it will give Essilor access to a new important channel of distribution in the U.S.. FGX uses a team of 2,400 field merchandisers who maintain more than 50,000 displays in large and small supermarkets, drugstores, duty-free shops and department stores. Its products are sold in 68,000 points of sale around the world.
In the proposed all-cash transaction, Essilor is offering to pay about $565 million for 100 percent of FGX, including assumption and repayment of its net dept of approximately $100 million. This represents a price per share of $19.75, or just over eight times the company's income from operations before amortization and depreciation (Ebitda) projected for 2009. The share price is 17 percent higher than FGX' average value on the stock exchange in the last month.
Using mostly its strong cash flow, Essilor has made 17 acquisitions so far this year. The present one is expected to close in the first half of 2010 and should be accretive as of 2010 considering the fact that FGX's Ebitda ratio of 21.2 percent is similar to that of Essilor. FGX will continue to be managed by its current executive team, led by Alec Taylor.