On November 15, 2019, the Cypriot holding company of the Rolf Group of Companies - Delance Limited - issued an official press release in which it announced the decision to sell the entire group to a single buyer. The fate of this transaction can be affected by many factors - the debt burden of the group, its past activity in the capital market, the state of the market as a whole and, of course, the criminal prosecution of the founder of the car dealer, Sergey Petrov. Let's try to evaluate these factors and try to make assumptions based on them about the price of a future purchase and the potential circle of buyers.
According to the official presentation of Rolf for investors, the Net Debt / EBITDA ratio decreased from year to year, at the end of the first half of the year it was 2.51x. Most experts do not consider this indicator to be at risk.
Potential buyers will obviously have to pay attention to the structure of the debt: the data of the Federal Notary Chamber base indicate that Sberbank is the main lender to Rolf, while business and luxury cars, as well as some assets of subsidiaries, act as collateral. . The first suggests that potential buyers should ask Rolf for detailed information on the ownership of these cars, since if they were also purchased with borrowed funds, then there is a pyramidal model of lending. The second is important because without fixed assets there is no business, so if it is impossible to service debts, the financial risks will be very high. It is worth noting that EBITDA in the first half of 2019 increased slightly (from 5.1 to 5.2 billion rubles compared to the previous year), but debt increased by almost 16%, while operating cash flow before tax and interest payments this year went into the negative zone and amounted to -0.5 billion rubles, according to IFRS reporting.
It is also important that Rolf is not very active in the Russian public debt capital market, since, apart from several Eurobonds in 2007-2009, the only issue this March is 3 billion rubles issued on the Moscow Exchange with a 3-year circulation period and coupon rate of 10.45% per annum. For a business with a semi-annual turnover of 114 billion rubles, this is very small; potential buyers should familiarize themselves with the reason for the issue precisely in this period, taking into account its volume, in order to exclude the option in which the placement of bonds was due to problems with servicing current bank loans.
An obvious omission is that Rolf works so little in the local bond market, because this debut issue received a total oversubscription of 2.5 times (7.5 billion rubles) from both institutions and individuals. I would like to believe that in the future the issuer will be more active, and bank security loans will gradually be replaced by public instruments, especially considering that the group has everything for this: foreign experience in Eurobonds, experience in issuing bonds on Mosbirzhe, ratings, IFRS reporting and , of course, leadership in the Russian car market.
Group activity factors on the M&A field
Over the past decade, Russia has experienced a number of economic events that have had a significant impact on the car dealership market, as part of M&A activity, many of the competitors have consolidated assets to increase market influence or sold assets to larger players as a result of bankruptcy.
The company did not stand aside, however, it approached the selection of objects for absorption selectively. So, in March 2016, a Pelican Auto dealer joined the group through a cashless exchange of shares between the companies. The organizers of the transaction were the same financial and legal consultants as with the upcoming sale of Rolf: CrestPrecise and Bryan Cave Leighton Paisner. As a result of the transaction, among other things, Rolf gained access to two strategically important brands - BMW and Nissan.
The general director of Rolf at that time - Tatyana Lukovetskaya - reported that they consider the model of merging with competitors from the middle of the rating of the largest dealer networks promising. Despite the announcement, it was the only transaction the company carried out. In professional investment banking circles, deals were discussed with Inchcap, Avtodom and Genser. At the same time, the last dealer, who was on the verge of bankruptcy in 2018, could be “saved” by one of his creditors - Sberbank, which is also the main creditor of Rolf. After the Russian Capital Bank initiated the Genser bankruptcy process, Sberbank and Rolf were negotiating a possible joint venture based on the Genser infrastructure, but did not reach an agreement and the transaction did not take place.
Recently, not only financial institutions have shown interest in Rolf. According to the founder of the company, Sergey Petrov, he was repeatedly approached with an offer to acquire the company in the fall of 2018. However, Petrov at that time was not ready for the sale of the company, so he rejected any offers. Among the proposals, one can also note unfriendly, from “obscure people with non-Russian surnames,” Petrov said in an interview with Meduza. And during the searches, the company received offers to purchase “at half price,” and in February 2019 the offer came from a competitor in the market - an Avilon dealer owned by Alexander Varshavsky. Petrov first called Varshavsky interested in a possible deal, and later stated that he was convinced.
To calculate the fair value of the business, we analyzed Russian and European M&A transactions from 2014 to 2019 in the automotive dealership sector and calculated the EV / EBITDA multiplier (this is the ratio of the company's value to its profit before interest, income tax and depreciation of assets). Further, the occupied market share, growth opportunities, and financial indicators of the company were taken into account. In our opinion, the multiplier can range from 7.5x to 8x. This is just below the value of 8.79, which Asvat Damodaran, professor of finance at Stern School of Business, New York University, cites as the average fair EV / EBITDA ratio for automotive retail in emerging markets, including Russia.
In this case, we take 8.145 as the average multiplier. Knowing EBITDA for the last 12-month period (11.9 billion rubles), as well as the group’s net debt (29.87 billion rubles), cash balances (3.19 billion rubles), a discount on the fact of the results year-on-year and some “problematicity” "Assets (-20%), the estimate given by such a model is 56.27 billion rubles.
Who will buy?
A company whose founder does not, in his own words, take part in the management of the company, finds himself in the face of prosecution in a controversial case - not the best object for absorption for foreign buyers. Therefore, in the first place, the nearest and largest competitors: Major, TransTechService, Avilon, Avtomir, Business Car, Favorite Motors, Inchcape, “May be the potential interested parties in the transaction to acquire the leader of the car dealer market” Avtospetscentr ”,“ KlyuchAvto ”and“ Avtodom ”. However, none of the competitors represented is capable of acquiring Rolf without resorting to a debt financing mechanism. And this means that Rolf should be in sight of the group’s creditors as well.
Sberbank remains the largest creditor of the company for a long time. It is at Rolfe that Sberbank serves a corporate fleet. Do not forget that Sberbank was interested in creating a joint venture to “save” Genser in 2018.
The next major lender is Alfa Bank, but it was already present on the Russian dealer market together with Goldman Sachs, having invested more than $ 300 million in the Independence car dealer. The dealer eventually went bankrupt, and the assets were sold to the closest competitors in the market. This suggests at least that the group of Mikhail Fridman F 7 will be more wary of considering such a proposal.
In general, you need to understand that the 100% cashout in Russian realities (and not only) is interesting for strategic players (corporations), and not investors. Therefore, it is reasonable to bet on the following scenario: a large holding (for example, the Russian Major, as the largest after Rolf) will resort to LBO financing from Sberbank (as the largest lender of the group who showed interest in this industry), and the repurchase will be financed for certain specific conditions favorable to the bank.
However, one should not forget about such an option, in which mitigating amendments to the currency legislation will nevertheless be adopted, the prosecution of Petrov will cease, after which the transaction will be completely canceled.