(News Bulletin 247) – The industrial laundry group has approached the American company Vestis, which is worth 2 billion dollars on the stock market. Investors fear a potentially very dilutive acquisition.

Elis collapsed on the stock market this Friday. The industrial laundry group plunged by 16.4% at around 11:30 a.m. to 19.33 euros.

The heavy stock market penalty is linked to press reports. On Thursday evening, Reuters reported that the group had approached the American company Vestis, a former subsidiary of Aramark specializing in the rental of work clothes.

The approach is said to have taken place a few weeks ago, according to sources familiar with the matter interviewed by the agency. These sources also added that it was not certain that Vestis would agree to a transaction with Elis and that other suitors could come forward.

Listed on the New York Stock Exchange, Vestis has lost 27% on the stock market since the beginning of the year. The company had issued a profit warning in its first-quarter results and saw an activist shareholder, Corvex Management, enter its capital. In addition, the company had to face a class action brought by a shareholder who accuses Vestis of having published misleading growth forecasts, explains Reuters.

Elis then confirmed on Friday afternoon that it had approached the company. “There is no guarantee that these discussions will result in the signing of a transaction or other agreement,” the company added.

The group warned that this operation, if it were to materialize, would be done under several conditions. First, that the company maintains its “investment grade” credit rating (non-speculative investment) with a debt leverage (ratio of net debt to adjusted gross operating profit) that would not exceed 2.2 in the first year following the acquisition and 2 in the second.

Furthermore, Elis assures that it will demonstrate “financial discipline” regarding the amount paid and that this acquisition should have a positive impact on earnings per share from the first year following the acquisition.

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Debt reduction in question

The fact remains that the market is therefore getting scared because Vestis represents a very big chunk for Elis. The American group is worth 2 billion dollars (compared to 4.6 billion euros for Elis) on the stock market at the close of Thursday and 3.3 billion dollars including debt, according to Reuters. Which would quite simply make Vestis the biggest acquisition in the history of Elis.

“The problem is that this is a very big acquisition for Elis, that there will be no synergies since the company is based in the United States where Elis is not present, and that this contradicts the previously held speech that there were no big ‘deals’ in sight and that the company wanted to reduce its debt,” explains an analyst based in Paris.

At the end of June, Elis had a debt leverage (measured by the ratio of net debt to adjusted gross operating profit) of 2.06 and expects to reach a figure of 1.8 by the end of next December.

Problem: given the size of Vestis and the group’s desire to defend its investment grade credit rating, financing such an operation with debt alone appears impossible.

The group would probably be forced to raise capital and therefore dilute its shareholders. “Beyond 300-400 million euros, Elis does not really have a choice and if the acquisition were to be carried out it would be ultra-dilutive,” estimates the analyst previously cited.

The Berendsen precedent

This news reminds the market of Elis’ previous major acquisition, the British Berendsen. In 2017, Elis bought the company for an enterprise value of around £2.2 billion (€2.6 billion). While the deal proved successful in the medium term, it took Elis two to three years to recover from the initial market doubts, and the company then had to focus on reducing its debt.

“This announcement (the press information from Reuters, editor’s note) echoes the public takeover bid for Berendsen in 2017, a target on which the group had returned to buying several times and which the market considers overpaid, the Elis share price having only just reached its level at the time,” writes TP ICAP Midcap in a note.

The research office also explains that the Reuters information is enough to cause a market freeze, while the company was on the path to debt reduction.

“We believe that the announcement of this approach should put pressure on the stock in the short term despite the attractiveness of the American market. It had been an effect for several months that the group had focused its communication on deleveraging (Elis was supposed to have reduced its leverage from 3 to 1.8 between 2020 and 2024), a strategy rewarded by the market,” he recalls.

However, TP ICAP Midcap considers that Elis’ approach to Vestis would not be “so surprising” since “on the one hand Elis had recognized that outside the United States, there were not many markets of significant size left in which to establish itself and on the other hand acquiring Vestis would offer a significant gateway to the American Workwear market, a very dynamic market shared between Cintas, Unifirst and Vestis”.