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5% senior
secured bonds due July 15, 2021 at 78.75 for a YTM of Y. Iceland Foods
is a discount grocer who focuses on the niche frozen food market. The
company has ~ 2% of the UK market and is the third largest frozen
food retailer with 14.1% market share. The UK grocery market is
undergoing significant change as German discounters Aldi and Lidl
take market share, forcing the Big 4 grocers (Tesco, Asda, Sainsbury
and Morrisons) to cut prices in order to be competitive. The old way of
building large hypermarkets on the outstkirts of town is going out of
favor as the financial crisis forced consumers to be smarter with their
money. As a result consumers are shopping at discounters and despite
the fact that the UK economy is doing better, this behavior is still
holding. In addition, Iceland has exposure to two other shifts in UK
consumer desires, convenience and online. Despite the pressures the
UK grocery market is currently undergoing, I believe Iceland will be a
survivor and now is a good time to start to build exposure to the name.
Iceland benefits from strong liquidity and a good free cash flow profile.
Icelands capital structure is pretty simple. The Company has an
undrawn super priority GBP 25 million revolving credit facility and then
3 senior secured bonds. The three bonds are a GBP 350 million L +
425 floating rate note due 7/15/2020, a GBP 400 million 6.25% note
due 7/15/2021 and a GBP 200 million 6.75% note due 7/15/2024.
Leverage through the notes is 5.4x (4.6x net) and on a lease adjusted
basis leverage is 6.2x gross (5.6x net). The Company has GBP 144
million in cash versus 951 million in total debt. Icelands business
model generates a lot of cash, generating GBP 500 million in free cash
flow over the past four years. The model provides negative working
capital and capex requirements are low at less than 2% of sales.
Capital expenditures and interest total about GBP 90 million annually,
leaving plenty of room to still generate positive free cash flow with LTM
EBITDA at GBP 176 million.
Iceland operates 844 stores in the UK, 6 in Ireland, 3 in the Czech
Republic, 2 stores in Iceland, and 23 franchise stores (12 in Spain, 7 in
Channel Islands, 3 in Isle of Man, and one in Portugal). The Company
was founded in 1970 by Malcolm Walker, who has been CEO of the
business since then, except between 2001 and 2005, when the
business was part of the Big Food Group. Iceland is largely exposed to
the UK market with 98.2% of sales in the UK. The Company first went
public in1984 and was taken private in 2005. In 2012, the business
was put up for sale and management led by Malcolm Walker agreed to
buy it for GBP 1.55 billion. Currently management owns 43.7% of the
company.