Currys plc (LON:CURY) has announced that it has entered into an agreement for the sale of Dixons South East Europe A.E.V.E., the holding company of Currys’ entire Greece and Cyprus retail business, trading as Kotsovolos, to Public Power Corporation S.A. for an enterprise value of €200 million (£175 million) on a debt free, cash free basis and excluding lease liabilities.
Following the Group’s strategic review which was announced on 16 June 2023 and having now agreed the terms of a sale, the Currys board of directors believes the proposed Disposal has strong strategic rationale and represents an attractive outcome for the Company’s shareholders. The Disposal will simplify the Group’s structure enabling it to focus on its larger markets of the UK & Ireland and Nordics, while simultaneously strengthening Currys’ balance sheet, increasing flexibility to invest and grow the business and improve shareholder returns.
Transaction Highlights
· The enterprise value of €200 million (£175 million), adjusted to include lease liabilities of €97 million (£85 million) as at 29 April 2023, implies a multiple of 6x adjusted EBITDA1 of €49 million (£43 million) and 14x adjusted EBIT[1] of €21 million (£18 million)
· The price reflects the strategic value of Kotsovolos’ market leading position, with strong brand awareness, a strong omnichannel platform, and a diverse mix of products and services;
· The multiple represents a material premium to the valuation at which Currys’ shares trade today, or have done over the last 12 months and consequently, the Board believes that significantly greater value can be realised for Shareholders from the disposal, when compared to retaining Kotsovolos within the Group;
· Net cash proceeds of the disposal are expected to be approximately £156 million (€179 million) at completion, after taking into account transaction and separation costs, intercompany balances and cash in the business;
· In the short term, the Board intends to use the proceeds to reduce net debt and then at the appropriate time, following peak trading, enter into discussions with pension trustees regarding the potential to reduce the pension fund’s accounting net deficit and required future contributions. Reducing indebtedness may also provide, at the appropriate time, the Group with greater flexibility to invest to grow the business, after which Currys will also explore the potential to return any surplus capital to Shareholders;
· The Disposal was unanimously agreed by the Board to be in the best interests of Shareholders; and
· The Disposal is expected to complete in the first quarter of 2024, subject to approval by Shareholders, merger control clearance from the European Commission or the Hellenic Competition Commission and certain other conditions.
Commenting on the Transaction, Alex Baldock, Currys Chief Executive said:
“This proposed sale of Kotsovolos is an excellent outcome for Currys and for our shareholders. It recognises Kotsovolos’s value and accelerates its realisation. As a Group, we’re focused on maintaining our encouraging momentum in the UK&I and getting the Nordics back on track; this disposal will further strengthen the foundations on which we do both.
Kotsovolos is a fine business that we’ve been proud to own. I’d like to thank our Greek colleagues for everything they’ve done for the Group, and wish them every future success.”
Citigroup Global Markets Limited is acting as sponsor and sole financial advisor to Currys on the Disposal.
A copy of this announcement is also available on Currys’ website at https://www.currysplc.com/
Next scheduled announcement
The Group is scheduled to publish its interim results on 14 December 2023
Introduction
Currys plc has agreed the sale of Dixons South East Europe A.E.V.E., the holding company of Currys’ entire Greece and Cyprus retail business, trading as Kotsovolos, to Public Power Corporation S.A. The Disposal values Dixons South East Europe A.E.V.E. at an enterprise value of €200 million (£175 million) on a debt free, cash free basis, and excluding lease liabilities.
The consideration payable on Completion shall be calculated based on:
· an equity value after adjustments for cash, debt and working capital of €268 million (£235 million) as at 29 April 2023; plus
· an additional daily amount which is calculated by multiplying an amount equal to €11,019 by the number of calendar days from 29 April 2023 until and including the Completion Date; less
· the amount of any defined leakage items,
(the “Consideration“).
The Consideration is payable in full and in cash on the date of Completion.
The enterprise value of €200 million (£175 million), adjusted to include lease liabilities of €97 million (£85 million) as at 29 April 2023, implies a multiple of 6x adjusted EBITDA2 of €49 million (£43 million) and 14x adjusted EBIT[2] of €21 million (£18 million) for the 52 weeks ended 29 April 2023. The value achieved recognises the market leading position of Kotsovolos, with strong brand awareness, a strong omnichannel platform, and a diverse mix of products and services. The acquisition multiple also represents a material premium to the current trading multiple of Currys, therefore representing an attractive outcome for Shareholders.
After adjustment for estimated transaction costs, separation costs and intercompany balances, and cash in the business, the net cash proceeds from the Disposal are expected to be approximately £156 million (€179 million)
In view of its size, the Disposal constitutes a Class 1 transaction under the Listing Rules. Completion is therefore conditional upon, amongst other things, the passing of an ordinary resolution approving the Disposal by Shareholders.
The Board expects that, subject to the satisfaction and/or waiver of the conditions precedent to the Disposal, Completion of the Disposal is expected to occur in the first quarter of 2024.
Background to and reasons for the Disposal
Overview
On 16 June 2023, Currys announced that it was conducting a strategic review of its Greece and Cyprus business, Kotsovolos, including exploring the potential disposal of the business. The board of directors of Currys actively reviews the Group structure on a regular basis with a view to considering alternative options for driving value for Currys shareholders. The Board believes that the strength of the Kotsovolos business and its long-term track record are not fully reflected in the Group’s valuation, and so earlier in the year the Board determined that it was appropriate to initiate a strategic review to consider whether Currys remained the right long-term owner for the business.
As part of this strategic review, the Board has considered several options for Kotsovolos, including separating the business or retaining the business within the Group, and concluded that a disposal, if it could be agreed on appropriate terms, would present Shareholders with the best outcome. Having now agreed terms with the Purchaser, the Board believes that the Disposal has strong commercial and strategic rationale for Shareholders for the reasons set out below.
The Disposal will create value for Shareholders
The Disposal and associated enterprise value of €200 million (£175 million), adjusted to include lease liabilities of €97 million (£85 million) as at 29 April 2023, represents an attractive valuation for Kotsovolos at a multiple of 14x adjusted EBIT of €21 million (£18 million) for the 52 weeks ended 29 April 2023. The acquisition multiple is at a premium to the valuation at which Currys Shares trade today, or have done so over the last 12 months. As a consequence, the Board is of the view that significantly greater value can be realised for Shareholders from the Disposal than retaining the business within the Group going forward.
The Disposal will strengthen Currys’ balance sheet and increase flexibility to improve shareholder returns
The Board intends to use the Net Cash Proceeds to reduce the Group’s total indebtedness in the short term.
At the appropriate time following the completion of the Group’s peak trading period, the Board will also enter into discussions with the pension trustees regarding the funding for the pension scheme.
On 6 July 2023, Currys announced alongside its preliminary results that the Board would not be declaring a final dividend for FY 2022/23. This was part of a series of measures to strengthen Currys’ balance sheet, including a reduction in capital expenditure, which the Board considered prudent in light of the uncertain outlook in the UK & Ireland and Nordic markets.
The Board considers the payment of dividends, and additional surplus returns of capital over time, to be an important part of delivering value to Shareholders and, therefore, after reducing financial indebtedness, reviewing the potential contribution to the Group’s pension fund and opportunities to invest in the business, the Board will explore the potential to return any surplus capital to Shareholders, based on a number of factors including the underlying financial strength of the business, prevailing market conditions, the balance of shareholder preference, and the scale of any proceeds to be returned.
The Disposal will simplify the Group’s structure
Over the last 9 years, Currys has successfully executed on a number of actions with a view to simplifying and focusing the Group around its core businesses in the UK & Ireland and the Nordics[3], including most recently the disposal of a minority equity investment in UniEuro in the year ended 1 May 2021.
Whilst Kotsovolos has a strong competitive position within the Greek technology retail market, there are limited synergies between it and the Group. It also represents only a relatively small amount of the Group’s performance compared to the UK & Ireland and Nordics segments, at only 7% of Group revenue (£637 million of the total revenue of £9,511 million) and 8% of Group adjusted EBIT (£18 million out of the total £214 million) (for FY 2022/23).
The Disposal will therefore enable the Group excluding Kotsovolos after completion to focus on improving profitability and long-term growth in its larger scale markets of the UK & Ireland and Nordics.
As disclosed in the Group’s trading update on 7 September 2023, in the UK and Ireland the performance of the business is seeing an encouraging trajectory, and management remain focused on continuing to strengthen performance and maintain its position as a leading omnichannel retailer of technology products and services. In the Nordics, the Group is making progress towards its goal of restoring the business to its previous healthy levels of profit and cash generation through the decisive actions taken on margins and costs saving measures.
Principal terms of the Disposal
The Disposal is being made pursuant to the terms of the Sale and Purchase Agreement. Under the Sale and Purchase Agreement, Currys has agreed to sell its entire shareholding in Dixons South East Europe A.E.V.E. for an enterprise value of €200 million (£175 million) on a debt free, cash free basis and excluding lease liabilities, subject to certain conditions precedent to Completion. The equity value after adjustments for cash, debt and working capital is €268 million (£235 million).
The Sale and Purchase Agreement contains certain warranties and indemnities given by each of Currys and the Purchaser which are customary for a transaction of this nature.
Completion of the Disposal is conditional upon the satisfaction (or waiver, where applicable) of the following Conditions:
· the passing of the Disposal Resolution by Shareholders at the General Meeting;
· obtaining a merger clearance approval from the European Commission or the Hellenic Competition Commission;
· obtaining a Foreign Subsidies Regulation clearance following a filing from the Purchaser before the European Commission or an ex officio investigation by the European Commission;
· obtaining third party consents to the Disposal from counterparties to certain contracts to which Kotsovolos is a party; and
· the execution of a commercial services agreement between Currys Group Limited and Dixons South East Europe A.E.V.E. with respect to the acquisition of certain original equipment manufacturer products by Kotsovolos.
The Board expects that, subject to the satisfaction and/or waiver (where applicable) of the Conditions, Completion is expected to occur in the first quarter of 2024.
Use of proceeds
On Completion, the Group expects to receive Net Cash Proceeds of approximately £156 million (€179 million). It is the Board’s intention to use the Net Cash Proceeds to reduce the Group’s total indebtedness (defined as the sum of net debt, pension deficit and lease liabilities). This will initially involve using proceeds to reduce net debt, and then at the appropriate time entering into discussions with the pension trustees regarding the funding for the pension scheme.
Reducing total indebtedness will provide greater flexibility to enable the Group to invest to grow profits and cashflow through the resumption of a normalised level of capital expenditure.
The Group will also explore the potential to return any surplus capital to Shareholders, based on a number of factors including the underlying financial strength of the business, prevailing market conditions, the balance of shareholder preference, and the scale of proceeds to be returned.
This planned use of proceeds is consistent with Currys’ stated capital allocation policy, and the Board intends to provide an update on use of proceeds to shareholders before the end of the financial year.
Reduction in financial indebtedness
In the short term, the Board intends to retain the entire Net Cash Proceeds in order to reduce a significant proportion of the Company’s financial net debt and ensure a strong balance sheet. Following Completion and assuming the Disposal had occurred on 29 April 2023, the Disposal would result in pro forma net cash of £62 million, as a result of the cash received from the Disposal being held on the Company’s balance sheet. The Group’s current committed facilities will all remain in place, ensuring the flexibility to manage the Group’s capital needs appropriately.
Potential contribution to the Group’s pension fund
As at 29 April 2023, the accounting net deficit in Group’s pension funds on a pre tax basis was £249 million. The Group has agreed to annual pension payments of £36 million in the current year, £50 million in the next financial year and £78 million in the subsequent financial year.
At the appropriate time following the completion of the Group’s peak trading period, the Board will also enter into discussions with the pension trustees regarding the funding for the pension scheme.
Invest to grow the business, profits and cashflow
At the Group’s full-year results in July, Currys outlined prudent actions to preserve balance sheet strength in the context of an uncertain economic outlook, including a reduction in capital expenditure. The Board will consider using proceeds to invest in high-returning initiatives as part of a potential return to normalised levels of capital expenditure in 2024/25.
Potential return to Shareholders
After reducing financial indebtedness, reviewing the potential contribution to the Group’s pension fund and reviewing opportunities to invest in the business, the Board will also consider whether it is appropriate to return any surplus capital to Shareholders. The Board will consider a number of factors including the underlying financial strength of the business, prevailing market conditions, the balance of Shareholder preference, and the scale of proceeds to be returned.
Discussions with relevant stakeholders, including pension trustees and other relevant parties, will be conducted in due course.
Financial effects of the Disposal on the Continuing Group
In the 52 weeks ended 29 April 2023, Kotsovolos contributed revenue of £637 million (€733 million based on a EUR to GBP foreign exchange rate of €1.00:£0.869) and adjusted EBIT of £18 million (€21 million based on a EUR to GBP foreign exchange rate of €1.00:£0.869). As at 29 April 2023, Kotsovolos had total gross assets of £430 million (€490 million based on a EUR to GBP foreign exchange rate of €1.00:£0.877). Following Completion, the Continuing Group will no longer receive the contribution that Kotsovolos currently makes to the adjusted EBIT of Currys.
Despite strengthening the balance sheet, it is expected that the Disposal will have a dilutive effect on the earnings per share of Currys in the first full year following Completion. Given the Purchaser is expected to acquire 100% of Dixons South East Europe A.E.V.E., the Company will no longer control the Kotsovolos business and therefore will cease to consolidate the Kotsovolos business in its financial statements on and from Completion.
The Net Cash Proceeds arising from the Disposal are expected to be £156 million (€179 million) at Completion after relevant adjustments including estimated transaction costs, separation costs and intercompany balances. For illustrative purposes only, following Completion and assuming the Disposal had occurred on 29 April 2023, the Disposal would have resulted in pro forma net cash of £62 million (€71 million based on a EUR to GBP foreign exchange rate of €1.00:£0.877 as at 29 April 2023), based on the Group’s financial position as at 29 April 2023.
Information on Kotsovolos
Kotsovolos is the leading technology retailer operating in Greece and Cyprus serving consumers and B2B customers through a national store estate, call centres and online platform. Kotsovolos had revenues of £637 million (€733 million based on a EUR to GBP foreign exchange rate of €1.00:£0.869) and Adjusted EBITDA of £43 million (€49 million based on a EUR to GBP foreign exchange rate of €1.00:£0.869) in FY 2022/23.
Kotsovolos offers a broad and diversified range of technology products including domestic appliances, audio & visual, computing, mobile and air conditioning, with many exclusive branded and private label products. Kotsovolos helps make technology affordable for customers through the responsible use of credit, enabled by detailed customer and transaction data and in house credit scoring capabilities and collection infrastructure, which allow Kotsovolos to rapidly and accurately assess customers’ creditworthiness.
The broad range of products is supplemented by a range of additional services to help customers make the most of their technology, including delivery, installation, protection (via “Total Support” insurance) repair and recycling, contributing to the financial performance of the business.
Kotsovolos operates an omnichannel model, with a nationwide store presence of 95 stores as at June 2023, of which 80 are owned and 15 franchisees, including 3 stores in Cyprus. Stores generated approximately 83% of Kotsovolos’ revenue in FY 2022/23 with online (including contact centre) accounting for approximately 17%. Unified commerce infrastructure enables flexibility and agility, including stores acting as delivery hubs, a single view of the customer across channels, and flexible personnel resource that can be re-tasked to support customer engagement and supply chain activity.
Kotsovolos has a wide customer reach, with approximately 78% of Greek households having purchased from the business in the last 5 years. It has almost universal awareness with Greek consumers and is regarded as the preferred retailer by consumers in many of its key categories, supported by the convenience of its stores, its consumer credit proposition and high standards of customer service.
Management’s strategy continues to make the most of the capabilities and infrastructure of Kotsovolos, with revenue and profit growth expected from new store openings, growth of the B2B and B2G channel, service expansion, continued range diversification and growth in retail media income, coupled with strong ongoing cost discipline.
Information on PPC
PPC is a leading power generation and supply company in Greece engaged in the generation, distribution and sale of electricity to consumers. It is the largest power supplier in Greece with a total capacity of 11.2 GW including thermal, hydro and RES power plants. It holds a 51% interest in the Hellenic Electricity Distribution Network Operator S.A. which is the sole owner and operator of the electricity distribution network of Greece.
Headquartered in Athens, PPC was established in 1950 and has been listed on the Athens Stock Exchange since 2001. Since inception PPC has grown to provide electricity to 5.6 million customers all over the country today. As part of its ongoing strategic plan, PPC is seeking to expand to new activities and value-added products in new business sectors. PPC is fully aligned to the 2050 climate neutrality goals of the European Union and Greece.
Information on the Continuing Group and future strategy
Following Completion, the Continuing Group will consist of the Company’s UK and Ireland and Nordics business segments. In the 52 weeks ended 29 April 2023, these divisions contributed revenue of £8,874 million, being 93% of the Group’s total revenues and adjusted EBIT of £196 million, being 92% of the Company’s adjusted EBIT.
Following Completion, the Continuing Group intends to pursue its strategy of delivering value for all stakeholders centred around its four strategic priorities: (i) Capable & Committed Colleagues; (ii) Easy to Shop; (iii) Customers for Life; and (iv) Grow Profits. Management’s objective remains to achieve at least a 3% adjusted EBIT margin with a solid balance sheet that enables healthy returns to shareholders.
· In the UK & Ireland, management will continue to focus on further strengthening profit and cash generation while remaining a leading omnichannel retailer of technology products and services, by improving the customer experience while improving gross margins and sustaining cost efficiency. Currys’ ambition is to build predictable, recurring revenue through long term customer relationships including across Credit, Care & Repair, and iD Mobile.
· In the Nordics[4], management focus will remain on protecting its omnichannel market position and rebuilding our profitability. In order to rebuild towards historic levels of cash flow and profitability the business will continue to build on decisive actions already taken across margin improvements and cost savings.
Overall, the Disposal supports a strengthening of the balance sheet, enabling Currys to deliver on its capital allocation framework to maintain a prudent balance sheet whilst also providing increased flexibility to invest to grow the business.
The Board expects to update Shareholders on this strategic progress when it announces the Company’s interim results in December 2023.
Current trading and prospects
On 7 September 2023, Currys published a trading update for the 17 weeks ended 26 August 2023. This trading update focused on the operational performance of each division as outlined below.
· UK & Ireland like-for-like revenue (2)%
o Revenue trends better in July & August than May & June
o Robust sales in domestic appliances and mobile, offset by weakness in other categories, especially computing
o Maintained gross margin improvements and delivery of cost saving targets
o Continued positive momentum in Services with credit adoption and protection services growing above expectations
o iD Mobile performing strongly
· Nordics like-for-like revenue (8)%
o Nordics revenue trends have improved slightly throughout period, although trading environment remains challenging
o Gross margin has improved due to actions taken including higher customer adoption of services
o Actions taken to deliver cost saving targets include: central headcount reduction, offshoring and contractor removal, IT procurement synergies, store lease and operating cost reductions, marketing expense rationalisation and goods-not-for-resale supplier consolidation.
· Greece like-for-like revenue +3%
o Trading continues to be robust despite short term impact from wildfires on customer footfall during August.
Alex Baldock, Group Chief Executive noted “Our priorities this year are simple: to keep the UK&I’s encouraging momentum going, and to get the Nordics back on track. We’re making good progress on both, in what continues to be a challenging economic environment. We remain confident that we’re building a stronger business that’s resilient today and fit to prosper in the longer term.”
There has been no significant change in the financial position or financial performance of the Group since 26 August 2023. The Company will next update the market on 14 December 2023, when it announces the Company’s half year results for the 26 weeks ending 26 October 2023.
Share schemes
Currys historically provided a discretionary staff share scheme for Kotsovolos employees with continuous service of one year or more (the “Kotsovolos Scheme“). Awards are made in February and July under the Kotsovolos Scheme. In April 2022, the Company decided to cease granting any awards under the Kotsovolos Scheme going forward. The awards granted to employees under the Kotsovolos Scheme were subject to a three-year vesting period and, as a result, some awards remain outstanding. Employees who are participants in the Kotsovolos Scheme will be treated as good leavers and awards will be paid out upon Completion.
Kotsovolos’ senior management also benefit from a discretionary long-term incentive plan (the “LTIP“). On Completion, participants in the LTIP will be treated as good leavers who will be entitled to a pro-rated portion of their award in the form of either: (i) Currys Shares, or (ii) a cash payment equal to the consideration received from selling the relevant Currys Shares.
Pensions
Kotsovolos operates a pension scheme which is presently arranged through a Currys approved broker with a local provider. Kotsovolos intends to continue to maintain and operate the current arrangements under its pension scheme following the Disposal.
General Meeting
The Company will be sending a circular to Shareholders in due course containing further details of the Disposal and convening a General Meeting for the purpose of seeking Ordinary Shareholder approval for the Disposal.
Financial advice
The Board has received financial advice from Citigroup Global Markets Limited (“Citi“). In providing its financial advice to the Board, Citi has relied upon the Board’s commercial assessment of the Disposal.
Recommendation
The Board considers the Disposal to be in the best interests of Shareholders as a whole. Accordingly, the Board unanimously recommends that Shareholders vote in favour of the Disposal Resolution at the General Meeting.
The Directors intend to vote in favour of the Disposal Resolution at the General Meeting in respect of their respective individual beneficial holdings of Currys Shares in which they have voting rights, being in aggregate 4,210,866 Currys Shares representing approximately 0.37% of the total issued share capital of Currys as at the Latest Practicable Date.
[1] Adjusted EBITDA and adjusted EBIT are prepared with the inclusion of leases under IFRS 16.
[2] Adjusted EBITDA and adjusted EBIT are prepared with the inclusion of leases under IFRS 16.
[3] This reference to Nordics includes the markets in Norway, Sweden, Denmark and Finland.
[4] This reference to Nordics includes the markets in Norway, Sweden, Denmark and Finland.
