Autogrill. unveils its. bold new game. inside this issue

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1 Reach, Reliability, Respect Autogrill unveils its bold new game ISSUE 33 MARCH 2008 Business commentary and analysis of key developments in the global duty free and travel retail industry for readers of The Moodie Report. All advertisements brought to you with Moodie Interactivity. The Moodie Report PLUS is published by Moodie International. Please direct any comments to Martin Moodie by Back issues can be found at Back in 1995 Autogrill was an unsung, quietly successful Italian food & beverage company specialising in the motorway outlet business, with annual sales of around 800. Thirteen years later, following the most momentous week in the company s history, it has grown into a 6 billion cross-border giant and the world s leading operator in the airport commercial revenues market. Last week saw the Benetton-controlled company win an intensely fought race for BAA retail subsidiary World Duty Free in a blockbuster (US$1.1 billion) deal, a price well ahead of most analysts expectations. And in a carefully synchronised double announcement, Autogrill then revealed that it had (as expected) taken full control of Spanish travel retailer Aldeasa by acquiring the 49.95% shareholding held by Imperial Tobacco Group of the UK. The two deals build on the groundwork laid by Autogrill s 1999 take-over of travel caterer-to-retailer HMSHost and the 2006 acquisition of Alpha Airports Group (now Alpha Group). In a presentation to analysts last week Autogrill talked of creating a new Global Travel Service Company. Put another way, it now constitutes a travel retail supergroup, one whose emergence transforms the industry landscape. For one company to make three acquisitions in such a short time frame (four if you include the first 50% of Aldeasa, acquired in early 2005) represents the greatest consolidation play in travel retail s 60-year history. The airport retail-to-catering side of Autogrill s business has a global footprint extending from continental Europe to North America, South America, the Middle East and South Asia. inside this issue Creating a 1.7 billion supergroup...2 An analyst s view...4 A question of synergies...5 Consolidation to continue...5 The end of a great experiment...8 Birth of a global company....9 His cup runneth over: Autogrill Chairman Gilberto Benetton can point to an outstanding track record of acquisitional and organic growth

2 Autogrill presence at Europe s top airports London Heathrow Paris CdG Frankfurt Amsterdam Madrid London Gatwick Munich Rome Barcelona Paris (Orly) London Stansted Group food & beverage presence Group travel retail and duty free presence No Autogrill presence Passengers per year (s) Source: Autogrill Investor Relations Department; Based on ACI passenger numbers for 2006 Autogrill Group investments in the travel retail business s Source: Autogrill Investor Relations Department Its duty free operations take in many of the world s most important sales locations, notably London Heathrow Airport (World Duty Free) and Madrid Barajas (Aldeasa) as well as key growth and/or emergent markets such as Saudi Arabia (Aldeasa) and India (Alpha, HMSHost) : 2007: 2008: 50% of Aldeasa Alpha Airports 50% of Aldeasa and WDF Asia is the weakest suit in portfolio terms, with only HMSHost and Alpha having a few pockets of strength. Putting HMSHost to one side, World Duty Free, Aldeasa and 1,685 Gianmario Tondato Da Ruos: looking for 40 in synergies by 2011 Alpha Group s tax and duty free business combined represents annual sales stretching towards 1.7 billion. The combined enterprise is a strong market leader in Europe (including the UK), offering significant scale advantages and a platform for further growth, Autogrill believes. A very telling slide in last week s group presentation showed Autogrill enjoying a retail or food & beverage presence in eight of Europe s top 11 airports (see chart), with the only exceptions being the two Paris airports and Munich. With Alpha and World Duty Free under its Autogrill travel retail operations ,000 1,500 Approx. 1,680 Approx. 1,440 s 1, Worldwide European Aldeasa World Duty Free Alpha travel retail & duty free business Source: Autogrill Investor Relations Department 2

3 Traffic evolution at the UK s top five airports % Million passengers % +73.4% +15.9% +44.8% 0 London Heathrow London Gatwick London Stansted Manchester London Luton Source: UK Civil Aviation Authority Autogrill European airport traffic breakdown % 15% 18% Autogrill Spanish airport traffic breakdown % 43% The Aldeasa/World Duty Free/Alpha troika will also look beyond Europe, promised Tondato Da Ruos. With market leadership in Europe and Heathrow and Madrid among other locations, we ll understand the needs of non-eu passengers better, he noted. We will also have dual leadership in the food & beverage and travel retail markets. That will help us accelerate our development in emerging markets. There will be sales synergies, the same customers, the same landlords. Spain UK Other EU countries Source: ACI and AENA Passengers from/to UK Source: ACI and AENA Other EU So is it a case of three into one for Aldeasa, Alpha and World Duty Free? The seemingly obvious, though organisationally complex, synergies between the three and certainly between Alpha collective wing, Autogrill now dominates one of the most lucrative travel retail channels the UK Spain route Mark Riches: from in-house retailer to concessionaire as well as the airport trade in both those key markets. As the travel retail industry digests last week s spectacular news, attention now moves from who would land World Duty Free to what they will do with it. That is the US$1.1 billion question. Autogrill CEO Gianmario Tondato Da Ruos gave a few early clues last week during the analysts presentation (page 9). He said the company was intent on creating a new game in the global airport services market. He expects the combined travel retail business to soon be worth 2 billion with the integration of World Duty Free, Alpha and the remaining stake in Aldeasa. 3

4 and World Duty Free had long seen Autogrill marked as our, and many others, favourites to land the big prize. Tondato Da Ruos noted: We re now seeking 40 in synergies by 2011, so you can expect we will be focused on achieving the integration quickly and on achieving the best business model possible. Aldeasa s flagship retail location Madrid Barajas Airport Terminal 4 is a template for global expansion So what will that model be? In the UK both World Duty Free and Alpha Group have headquarters within minutes of each other, at or near Heathrow, and several mirrored functions from CEO through senior to middle management positions. When the word synergy is floating around the corporate air that The analyst s view: Twin-deal approach pays off A high price for World Duty Free, value for Aldeasa and better than expected synergies that s the verdict on the two Autogrill acquisitions from Guillaume Rascoussier, a Financial Analyst for French brokerage company Oddo. Rascoussier has been covering Autogrill for four years and Dufry for two, and tracked the World Duty Free sale closely in the run-up to this month s announcement. In mid January he said that Autogrill was the favourite to secure the deal, noting: The acquisition of World Duty Free would open up other markets to Autogrill and, above all, give it a key competitive advantage in terms of buying power. We think synergies would be lower than for Dufry, but there should be value creation (extra value of 0.8 per share) and the dilutive impact should be very low (-3% in year one) initially. So what did he make of the final price paid? In fact the acquisition must be considered in the wider context of Autogrill s same-day announcement of its buy-out of the balance of Aldeasa, he said. Autogrill has carried out two simultaneous acquisitions, he noted. The group acquired the remaining 50% in Aldeasa and World Duty Free for and at a multiple of 12.2x EBITDA [he forecast 12x EBITDA Ed]. A bigger accretive impact from the initial operation should offset the higher-than-expected dilutive impact from the second operation. Moreover, he noted, these acquisitions, which were prepared and expected for a long time, fit very well with Autogrill s business model and are significant sources of synergies. Oddo had only foreseen 10 in synergies, well short of the 40 [by 2011] quoted by Autogrill CEO Gianmario Tondato Da Ruos to analysts after the deal was revealed. Rascoussier noted that Autogrill had bought the 50% balance of Aldeasa for a relatively low multiple of 9.2x EBITDA, equating to an Enterprise Value (EV) of 750 for 100% of Aldeasa and therefore a further investment (debt included) of 355 for Autogrill. We were expecting 10x EBITDA and around 450, he continued, concluding: The impact should be significantly positive we forecast an accretive impact of +4% according to preliminary estimates. This underlines the shrewdness of the acquisition of 50% of Aldeasa in 2005 the group has been able to ensure low multiples for the acquisition of the rest of the company. Of the World Duty Free deal, Rascoussier wrote simply: The price tag was high. Oddo had been expecting around 450, over 100 short of the final price tag. This equates to a high multiple of 14.5x estimated 2007 EBITDA (we were expecting 13x and 10.5x out to 2010, once restated for synergies). However, his conclusions underline just how good Autogrill s due diligence was. Oddo had underestimated the 2007 EBITDA margin (8.9% vs forecast of 8.5%) as well as the level of synergies. After factoring in these synergies, Rascoussier noted, the acquisition multiples should drop to 9x EBITDA. In short, the deal starts to weigh up and sooner, rather than later. He continued: We calculate there will be a dilutive impact of -4% in year one, then an accretive impact of +2% in year two; and the profitability of the transactions stands at a low 8% of estimated 2008 ROCE (Return on Capital Employed) before tax (versus a WACC Weighted Average Cost of Capital of 8%), but which will increase sharply after the materialisation of the synergies. After these transactions, he concluded, Autogrill s debt should be close to 3.5x estimated 2008 EBITDA and 3.0x estimated 2009 EBITDA. We believe these levels are manageable for a tourist concession activity whose cash generation is not very cyclical. 4

5 means certain positions will have to go. The maths is pretty simple take out, say, a 100,000 job and even allowing for that amount in redundancy it still means a 1,100,00 saving over the period of the World Duty Free contract. Functions, people and buildings are the obvious early savings targets. Where are the other crossovers? North America to some extent Alpha has an excellent operation in Florida, while Aldeasa is in Atlanta and Vancouver, and of course HMSHost is omnipresent throughout the region. But a potential Indian synergy with Alpha disappeared when Aldeasa chose not to proceed with its joint venture with ITDC there last year. Note though that HMSHost is making a big play for India, having secured contracts at the new greenfield airports of Hyderabad and Bangalore. But some people probably Aldeasa CEO José-Maria Palencia Saucedo (an important influence in the deal), as well as Tondato Da Ruos have some important branding and positioning decisions to make. Does the carefully nurtured Alpha brand survive in the new set-up? Which logo will Manchester Airport, for example, eventually have over its duty free shops? Both Aldeasa and Alpha are established and well-travelled international brands. Will a single mother brand emerge? All intriguing questions. But the most interesting synergy of all will be (Autogrill hopes) on purchasing. Can the supergroup, in age-old retailer style, extract better margins across its Aldeasa s José-Maria Palencia: a quietly influential figure behind both deals Aldeasa sales evolution s 1, Source: Autogrill Investor Relations Department whole portfolio both from the powerhouse brands and from others prepared to give ground on margins in return for big volume opportunities? Tondato Da Ruos clearly believes the answer is yes. Speaking at an analysts conference last Monday he noted: If you look at the SKUs of the three companies I think you probably have an overlapping of something like 60 to 70%. It is quite clear that combining the expertise, not only the purchasing but the visual expertise and the crossselling opportunities of the different companies, will achieve an important number on the top line. Certainly one can expect a number of fundamental changes within World Duty Free. Remember for 12 years this has been one of the industry s most visible examples of the owned-retail concept. Its own senior management, notably former BAA Group Retail Director Brian Collie and Managing Director Mark Riches, have been articulate advocates of that model, arguing that a profit-sharing relationship instead of the concessionaire model of focusing on minimum annual guarantees leads to greater investment in merchandising, staff and store quality. It even formed a joint venture called Global Airport Services (with Steve Franklin, Randy Emch and Adrian Murray of Crossbar Associates) to promulgate the model at overseas airports, though the concept ultimately won no converts % p.a. 630 Autogrill buys 50% +13.2% p.a As of Monday that model is no more. World Duty Free, under new ownership, is a concessionaire. It will pay minimum annual guarantees (around 31% of turnover) and it will be as bottom linedriven as any of its competitors. A new chapter is beginning. Consolidation to continue Autogrill s triple acquisition of Aldeasa, Alpha Group and World Duty Free represents travel retail s biggest consolidation play. But we don t think the sector s concentration is over: in fact the events of recent weeks seem likely to spark more of the same, certainly once global credit conditions ease. The full price paid for World Duty Free will not have gone unnoticed by the

6 The world s top (airport and other land-based) travel retailers Alpha Group Turnover in (billions) World Duty Free 0.4 Aldeasa DFS Group Autogrill *The Nuance Group **Gebr Heinemann * Excluding joint ventures ** Includes wholesale All reported turnovers converted (where applicable) at rates as of 5 July Dufry Lotte Duty Free Aer Rianta & ARI Dubai Duty Free Aelia King Power International Hellenic Duty Free Shops Source: The Moodie Report investment community or the owners of other duty free companies. While Autogrill may have enough on its corporate plate to keep it occupied for the next couple of years, its main rivals in the contest for World Duty Free will certainly be seeking out alternatives. Dufry may have lost out to its arch rival Autogrill in this contest, as it did in the two-way 2005 battle for Aldeasa, but it is relaxed about the situation, believing there are plenty of remaining targets, all with less risk than such a high price target as World Duty Free represented. Interestingly, Dufry s stocks rose sharply on the news of its failure to land World Duty Free, climbing a remarkable +18.7% in the week. That says much about how the markets viewed this acquisition effectively by not spending a cent Dufry s market value has risen by nearly a fifth. Dufry Group Chief Financial Officer Xavier Rossinyol told Bloomberg in a video interview (available via The Moodie Report.com) last week: The market is still very fragmented. 65% to 70% of the market is in the hands of other operators, rather than the ten main operators in the market, so there are still several opportunities we are looking at purchasing. Rossinyol said the group is still focusing on emerging markets with tourist potential. We have seen in the last four years that [policy] allows us to multiply ourselves by three Brazil, Russia, the [United Arab] Emirates and the Far East are performing very well and we keep focusing on that area, strategically speaking. He said that Dufry had been very positively surprised at the level of support for the recent fund-raising [for World Duty Free] that it received from traditional banks, adding: Still we feel comfortable of being able to finance the acquisitions we look for. So where are the targets outside and within the top retailers league? The chart on this page shows the impact of the Aldeasa and World Duty 6 Free acquisitions. The combined triumvirate leapfrogs its erstwhile bigger cousins, Dufry, Gebr Heinemann and The Nuance Group. Aer Rianta International and Aer Rianta Retail, Dubai Duty Free, Aelia, King Power International, Lotte Duty Free and Hellenic Duty Free Shops

7 Alpha Future in Delhi (pictured) offers a bridgehead to India a fragmented, complex market also recently entered by HMSHost and rivals DFS Group and The Nuance Group round out the major league. Duty Free Americas, owned by The Falic Group, doesn t publish its numbers but is another leading player, dominating the US airport and land border duty free market. Of that list, The Falic Group and Aelia (through parent company Lagardère Services) bid for World Duty Free, both tabling offers well in excess of 400. Gebr Heinemann is a minority stakeholder in Aelia. Will the Falic family and Lagardère Services redirect their interest elsewhere? Duty Free Americas President Leon Falic told The Moodie Report in a telephone interview in January that The Falic Group had secured a US$1.2 billion warchest for acquisitions in the travel retail and luxury sectors, and had earmarked a substantial proportion of that for World Duty Free. Ultimately the company didn t make the second round, whereas Lagardère Services was one of the shortlisted five, alongside Autogrill, Dufry, a private equity group and the surprise package, Distripar, the powerful Belgian company that controls Belgian Sky Shops. DFS (outside the geographic radar) and The Nuance Group (too risky) didn t bid. Lagardère Services, acutely disappointed at last week's result, will now be looking hard at alternatives. Elsewhere in the industry s premier league we think there are firm no sale signs over Gebr Heinemann, Dufry, Lotte, Dubai Duty Free, Aer Rianta International/Aer Rianta Retail and King Power International. DFS was famously declared non-core by LVMH Chairman Bernard Arnault in 2001 but has undergone a strong renaissance since, underpinned by its focus on the travelling Chinese to bolster its traditional reliance 7 on Japanese consumers. It s hard to see it changing hands in the near term. Cash-rich and highly profitable Hellenic shapes as both potential buyer and seller, as does Duty Free Americas. The Nuance Group remains the most difficult to read. Its often painful battle back to profitability is succeeding gradually but, given the fragmentation of the sector, it seems likely to figure in some form of consolidation in either direction eventually. Outside the top ten, there are plenty of national targets; and the executive responsible for business development in each of the industry majors is poring over a similar list. Make no mistake, as the money markets heat up, so will action in this sector. It's a fascinating scenario. Gianmario Tondato Da Ruos new game is set to be contested by more than one player.

8 The end of a great experiment The creation of World Duty Free in 1996 prompted as many headlines as did its sale over a decade later. And each event, in its own way, will go down in the industry s annals as a watershed moment. The birth of BAA s own dedicated retail division was a seismic shift in the duty free world of the 1990s. Here was one of the world s biggest airport groups turning its back on the concessionaire-led and management partner models that had served the mighty BAA so well down the years. And it was a huge blow to the long-time giants of UK airport retail, Allders International and Alpha Retail. The move followed BAA s unsuccessful 1996 bid to acquire Allders International, which after a two-way bidding war was bought by the ill-fated Swissair for 160 and renamed Nuance Global Traders (now The Nuance Group). Unbeknown to most in the industry, BAA also came within hours of creating a new alliance with Alpha Airports Group only to be thwarted by the dramatic last-minute intervention of Harrods owner Mohamed Al- Fayed, who paid 52 for a 25% stake in Alpha. Alpha said the sale to Al-Fayed s Cylena Establishments came as an unexpected development. It was the understatement of our times. Al-Fayed s move in fact came just hours before BAA Group Retail Director Barry Gibson and Alpha CEO Paul Harrison were due to announce the new partnership following an embargoed interview with Martin Moodie (then Managing Director of Duty-Free News International) a day earlier. It was the industry s most famous story that never was. Having not been able to buy a duty free retailer, BAA instead created one World Duty Free. Explaining the rationale, Gibson said: The goodwill alone involved in buying the Allders business [would have been] very substantial. You re actually buying a group of contracts, and the expertise to operate them: there are very few assets involved. There s a price at which you think you can do it yourself, and that s a more attractive option. World Duty Free s first CEO, ex-dfs and ex-allders executive Bob Livingstone, added: If you re not bringing any history along with you, you can do things the way you ve always wanted to; you can set yourself high standards. It s a superb opportunity. BAA already owned the stores that its management partners had operated. And it knew the customers that entered or didn t enter those stores. Its new creation, unhindered by minimum annual guarantees, would instead be able to focus on the upside potential of the business via a profit-sharing agreement with a benevolent landlord. For Livingstone it was the logical end of an already lengthy process. In the ten years I ve been dealing with BAA, we ve seen the evolution of the retail department: getting more involved, understanding the retail business. Doing it themselves is just one step further in that evolution. Through the words of Barry Gibson in particular, there are echoes too of the World Duty Free ethos that has infused the company s attitudes to retailing ever since. Most duty free operators are dinosaurs, not retailers, he said, in a typically forthright soundbite that managed to upset just about every competitor at the time. Very few are what you would call dynamic, customer-facing retail businesses. We have an opportunity to attract a nice blend of the very best people from the very best retailers from around the world. World Duty Free has indeed achieved many good things during the past decade. At its best Heathrow Terminals 3 and 4 in liquor, fragrances & cosmetics it has been among the best in the industry. Interestingly its current Managing Director, Mark Riches, has been one of the most articulate advocates of the owned retail model. But he has also consistently contended that the model is not all that counts it is the retailing philosophy that ultimately makes the difference. In 2005, in a powerful speech at The Trinity Forum in Dubai, he contended: We know that to truly maximise the opportunities ahead the model needs to be designed to suit not our agenda but that of the customer. There is no perfect solution to fit all but whatever model you choose to work with it must be customer-led. If your model is designed to work for the customer then it will work for you, your partners and your stakeholders. Will the new World Duty Free, under whatever banner it embraces, continue to offer that consumer-led philosophy? Will a MAG-driven model become less investment orientated and more focused on retained margin? As one great experiment bows out after a decade, a new and uncertain chapter in UK airport retailing is beginning. 8

9 A global travel service company is born Speaking to analysts and media soon after the twin announcements of the World Duty Free and Aldeasa deals, Autogrill CEO Gianmario Tondato Da Ruos outlined the big picture for the group. Our vision is to be the world s leading provider in food & beverage and retail services for travellers, he said. I think we have achieved this by following our strategy of organic growth and acquisitions. Today we are here to talk of the creation of the largest global travel retail footprint and strongest European platform as a division of Autogrill. Tondato Da Ruos talked about the Autogrill journey since its flotation on the Milan Stock Exchange back in 1996 to a multi-national, multi-brand enterprise with a third of its sales in North America and just 20% in Italy. That s impressive diversification in anyone s language. Towering ambitions: Autogrill foresees a fully integrated company in a very, very short time frame One of the spearheads of that diversification has been Aldeasa s marked transformation since its acquisition in 2005 by Autogrill and the largely silent copartner Altadis (now owned by Imperial Tobacco) from a mainly Spanish market player to a fast-growing international company with new operations in Canada, the US, Kuwait and Saudi Arabia. Why is this [extra] +50% acquisition essential for us? Tondato Da Ruos asked. It is a matter of scale, growth, local and global footprint and operational excellence. But what did we bring to Aldeasa? he asked in an interesting follow-up. Empowering the incumbent management and working with their expertise we have been able to move the company together from 5.5 [point] historical growth to robust double-digit growth. Even more important is doubling the size of the international business in three years from 15% to 30%. Referring to World Duty Free as the new kid on the block Tondato Da Ruos said: The first piece of very good news is that the length of the concession contracts that we have negotiated is 12 years, with important opportunities to extend them. That s a telling remark, and one he later revisited, adding: I am very optimistic that we will be able to extend it beyond the current time. There you start to get some hints as to why Autogrill paid such a full price, in circumstances that given the credit crunch and Ferrovial s own financial pressures would seem to have dampened down the valuation. He also spoke about the upside potential of the new European troika, noting: The combination of Alpha Retail, Aldeasa Retail and World Duty Free will create the world s leading airport retail and duty free operator. Even more important from a business point of view, this combination will create the number one European player, with significant scale advantages and an important platform for growth. Being number one is not just a question of numbers. The size will allow us to play a new game optimising the European buying and supply chain, sharing operational practices across the group and allowing us to be a magnet for top talent. And note these words: The European leadership footprint, including the key Heathrow and Madrid assets, will be 9 a showcase and enable us to understand the needs of the non-european customers. This understanding will help us to develop targeted offerings for other passengers, like the ones coming from the US, India and the Middle East. Another synergy, he said, was that between retail and food & beverage, notably in India. There Alpha runs Cochin and Delhi duty free, while HMSHost holds the food & beverage operations at the new airports in Bangalore and Hyderabad. He concluded: Creating the global travel service company we have an important potential upside, not only through expanding into different geographies and different business lines, but also by cross leveraging our two business lines in geographies where we are already present. Aldeasa CEO José-Maria Palencia noted: We have past experience and we could be operating as a fully integrated company in a very, very short time frame. We have been calculating very realistic synergies in terms of costs and top line. Obviously it is going to be challenging, but it is very, very affordable.