EssilorLuxottica and Hal Holding confirmed last Wednesday that they have reached agreement on the sale of Hal's stake of 76.72 percent in GrandVision to Essilux for the previously reported purchase price of €28.00 per share in cash.
Laurent Vacherot, chief executive of Essilor, revealed that Essilor and Luxottica had already envisaged this big move while discussing the merger between their two companies. They approached Hal last October. The negotiations went very quickly. The project received the unanimous support of the supervisory board and the management of GrandVision after it was informed about the deal at the beginning of July.
In an interview with the daily Corriere della Sera, Leonardo Del Vecchio, Essilux's co-chairman and founder of Luxottica, confirmed that “we had been thinking about this deal for years.” He added that an agreement was achieved in an extremely short time under the leadership of Francesco Milleri, the chief executive of Luxottica, now a fully-owned unit of Essilux. Del Vecchio added that the purchase of GrandVision is “only the first step,” without elaborating on what may come next.
Essilux plans to shortly launch a bid for the remaining shares at the same price. The tender offer should be concluded within six months, but it will have to wait the blessing of regulatory authorities to be finalized. Both sides indicated that this part of the process will likely take between 12 and 24 months. They said that they were confident of its swift approval as they have already made a pre-assessment of the anti-trust implications.
Vacherot said he felt that the European Commission will take less than a year for its probe as it has already gained an understanding of the sector through its previous investigation into the combination of Essilor and Luxottica, which ended with a favorable verdict. Anyhow, the contract between Hal and Essilux stipulates that Hal and GrandVision will get a 1.5 percent increase in the agreed purchase price if the closing takes place after July 31, 2020. Hal will have exclusivity even in case of a superior offer, and it will be entitled to a cancellation fee of €400 million under certain circumstances. Furthermore, GrandVision will continue to pay dividends of up to 40 percent to Hal and its other shareholders until their shares are sold.
As previously reported, the agreed purchase price represents a premium of 33.1 percent over GrandVision's share price on July 16, when the first rumors about the deal emerged. It values Europe's largest optical retail group at €7.1 billion excluding assumption of debt. The deal will be accretive to Essilux' results from the first year, generating synergies in the long term.
In spite of its abundant cash flow, Essilux plans to finance the takeover mostly with debt, paying an annual interest rate of about 2.5 percent as before. It may issue some new equity, but without selling any shares to Hal as part of the purchase price.
If consummated, the takeover of GrandVision will create a more balanced group profile across channels and regions with an annual turnover of nearly €20 billion and about 18,000 retail stores around the world. Including online operations, the retail share of Essilux' revenues would grow from 35 percent to 47 percent. The stores operating in Europe would represent 35 percent of the global retail fleet, up from about 10 percent at present.
GrandVision had a total of 7,265 stores as of June 30. As 88 percent of GrandVision's sales are now in Europe, its management will be responsible for all the group's retail operations in Europe, the Middle East and Africa. Essilux' or Luxottica's management would be responsible for the Americas and Asia, and the partners indicated that the enlarged group will pursue new opportunities in emerging markets after the deal is closed.
Executives of Essilux and GrandVision presented the deal as an opportunity for GrandVision to accelerate the execution of its strategic plan by creating an international multi-channel retail group that will drive the evolution of the optical retail sector, better responding to the changing behavior of consumers, for the benefit of all the suppliers. There is no doubt, however, that Essilux will likely draw more benefits than other suppliers of lenses and frames from the verticalization.
Questions are raised about Essilux' takeover of GrandVision
GrandVision's share price increased on the news that the takeover has been confirmed, but it has since remained almost one euro below the purchase price, indicating that the financial community has some doubts that the parties will strike a deal or that the transaction will obtain regulatory clearance, with or without major conditions. Hal was clear in warning that there is no assurance of an agreement.
GrandVision also candidly pointed out that the regulatory process will be lengthy as the transaction will have to be examined by various jurisdictions. It gave an estimate of 12-24 months for clearance.
Evidently, there is some concern that anti-trust authorities may block the deal or that some European retailers will react negatively to it, ordering less from Essilor and Luxottica and more from their competitors. We would like to remind our readers that Luxottica has until now shied away from massive acquisitions on the retail front in Europe, except in its domestic Italian market, to avoid entering into competition with its wholesale clients in the region.
It was a different story in the U.S., where Luxottica initially decided to take over LensCrafters, Sunglass Hut and other big local retailers to obtain a stronger position at a time in a market where the Safilo Group had a larger turnover. Essilor International has similarly resisted the temptation to go vertical, except with e-commerce.
As for Hal, it has kept a vertical structure in the last few years as the major shareholder in Safilo, which is struggling to make a decent profit. Safilo decided a few weeks ago to divest its only retail operation, the loss-making Solstice chain of sunglass stores in the U.S.
Essilux' acquisition of GrandVision would add a group that generated adjusted Ebitda of €576 million last year on revenues of €3.73 billion from an estate of 7,095 stores in 40 countries. Its main strength is in Europe, complementing Luxottica's strength in the U.S. at the retail level.
While commenting on Essilux' financial results, executives of Essilor and Luxottica played down speculation that their wholesale operations with other retailers in Europe will be affected by the takeover of GrandVision, if it goes through. They pointed out that Luxottica's wholesale business in Italy did not suffer “any significant push-back” after the company took over one of the leading Italian optical retail chains, Salmoiraghi & Viganò. They also mentioned “a plan to mitigate” the effect of the takeover on other retail clients by providing more support for their own development.
For its part, the management of GrandVision declined to answer questions about potential cost synergies or the future share of Essilor's and Luxottica's products in its stores. For the time being, Essilor is selling very few lenses to GrandVision due to the latter's international supply agreement with Hoya Vision Care, whose terms will continue to be honored.
Hoya could not be reached for comment on the takeover, but an analyst felt that it will likely criticize the takeover of one of its biggest clients in the court of the European Commission's anti-trust investigation. GrandVision signed a major lens supply deal with Hoya that took effect in the summer of 2014, replacing deals that the retailer had with Essilor as well as Carl Zeiss Vision. Essilor's European sales were immediately affected, but it seems likely that GrandVision will turn back to Essilor after the takeover is completed.
On the other hand, anti-trust authorities have been rather lenient with Essilor and Luxottica so far. They have just approved Luxottica's conditional takeover of Barberini, the world's biggest supplier of mineral lenses, which has an annual turnover of around €85 million. About half of that is generated by its business with Luxottica.
Morgan Stanley estimated that Essilux will end up with a combined market share of about 20 percent in terms of own retail in Europe and worldwide. It does not see the takeover leading to a dominant position.
Safilo's chief executive, Angelo Trocchia, defined Essilux' acquisition of GrandVision as “an additional disruptive force for the industry,” which had been relatively stable for quite a while. Safilo will be seeking solutions to the new reality, he added.
According to Safilo's 2018 financial report, sales to GrandVision amounted to €52.4 million, down from €57.0 million in 2017, but they nevertheless represented 5.4 percent of the eyewear manufacturer's overall top line.
Like GrandVision, Safilo is controlled by Hal. Trocchia indicated that Safilo would take part in any anti-trust investigation regarding the acquisition of GrandVision. We could not reach executives of Hal for a comment, but when asked whether Hal intends to keep its investment in Safilo, Trocchia noted that the Curaçao-based holding company is a long-term investor that demonstrated its commitment to the company by taking part in Safilo's recent €150 million rights issue.
Hal has been an investor in GrandVision since 1996. It represented 33 percent of its net assets at the end of 2018. On the other hand, Hal has also been investing in many other sectors, including non-optical online retailing. A few weeks ago, its raised its stake in Coolblue to 49 percent, after raising it from 20 to 30.1 percent a couple of years ago. Coolblue is the second-largest generalist web store in the Benelux countries with a turnover of €1.35 billion in 2018.
Observers are questioning the timing
Industry players and observers generally expected Essilux to make a move in Europe to implement the vertical integration model that Luxottica has been pursuing in the U.S. and other countries, but its timing came as a surprise. One wonders whether it came so quickly because another party was interested in acquiring GrandVision.
Essilor and Luxottica completed their merger only in October 2018 and then rapidly descended into a boardroom feud between the new group's two executive chairmen, Leonardo Del Vecchio and Hubert Sagnières (see Eyewear Intelligence Vol.20 n°8). They recently reached a truce and a few weeks ago released an internal memo defining the senior management roles. The company is still selecting a chief executive.
In the Corriere della Sera interview, Del Vecchio again commented on the management issue by noting that the group is proceeding very well without a CEO. He said that the search for a CEO continues “but without hurry.” He added that, with GrandVision, Essilux is acquiring an “excellent” management team.
A recent internal memo reveals that the group had to appoint two managers for some key positions, each one representing the Essilor and Luxottica blocs. The most notable example of this dual structure is the finance department is still run by two chief financial officers, Stefano Grassi and Hillary Halper. The same dual structure applies for human resources, investor relations, group integration and the board's secretary post.
Other senior positions have been split between the two sides. The Luxottica team obtained communications, merger & acquisitions and internal audit, while Essilor got to run the legal office, compliance and the group's sustainability program. An expert in corporate strategy estimates that the distribution of powers enables the blocs to control one another.
UBS warned that the purchase of GrandVision could cause additional execution risks at a moment when Essilux still has to define how it will achieve the synergies resulting from Essilor's and Luxottica's merger. The group is expected to be more explicit on this point at a meeting with investors in London on Sept. 25.
Morgan Stanley noted that Luxottica has proven its ability to make strategic decisions in spite of friction within its own management. But the U.S. investment group wonders whether Essilux can squeeze additional value out of GrandVision, which is generally positioned toward a lower market segment than the French-Italian group's premium products.
GrandVision's acquisitions in Italy and Switzerland (see the related story in this issue) indicate, however, that the retail group is trying to cover all the segments of the market, just like Essilor with its multi-segment strategy in the lens sector.
Morgan Stanley says that Luxottica has been very proactive in managing the LensCrafters chain in the U.S., where the retail industry is undergoing significant disruption. It was also very astute in relaunching the Ray-Ban brand, which it acquired in 1999.
A brokerage firm, RBC Capital Markets, was quite bullish about Essilux' takeover of GrandVision, predicting that it will boost the group's earnings per share by 7 percent. Another broker, Bryan, Garnier & Co., was more downbeat, expressing concerns about the reaction of the group's clients and the anti-trust authorities.
Moody's confirmed its A2 long-term rating for Essilux in the wake of the GrandVision announcement. While the rating agency expects the acquisition to weaken the group's balance sheet, it noted Essilux' intention to finance part of the deal with €2 billion of equity or equity-like instruments.
The agency anticipates that the takeover will generate revenue and cost synergies over time. But it also sees a risk that some clients “may seek to shift suppliers of lenses” as Essilux becomes a larger competitor in Europe. Like other observers, it also cautions that the new deal is taking place while the group is still working on the integration of Essilor with Luxottica.
Officials from the two companies are meeting every other week to take decisions on 22 priority areas for the integration of their respective operations.