WEBVTT 1 00:00:07.300 --> 00:00:11.200 Hello and welcome to this vidcast which is originally devoted 2 00:00:10.200 --> 00:00:13.300 to an acquisition in a North 3 00:00:13.300 --> 00:00:17.100 American retail industry. But which introducing relay 4 00:00:16.100 --> 00:00:20.000 state looks like a very interesting Financial 5 00:00:19.000 --> 00:00:20.800 engineering? 6 00:00:22.300 --> 00:00:25.100 On the 14th of October of this year a few 7 00:00:25.100 --> 00:00:28.600 days ago Kroger number five in the 8 00:00:28.600 --> 00:00:32.000 United States offers 34.1 US 9 00:00:31.400 --> 00:00:35.200 dollars to buy each and every Albertsons share 10 00:00:34.200 --> 00:00:37.400 the albertans Enterprise Value 11 00:00:37.400 --> 00:00:40.200 is then about 25 billion dollars, 12 00:00:40.200 --> 00:00:43.900 which is five to six times the adjusted a 13 00:00:43.900 --> 00:00:45.200 bit that generated by The Firm. 14 00:00:45.900 --> 00:00:48.700 If you deduct the net financial debt from 15 00:00:48.700 --> 00:00:51.200 this Enterprise Value, you get the value of equity which 16 00:00:51.200 --> 00:00:53.000 is about 20 billion dollars. 17 00:00:53.700 --> 00:00:56.400 That looks fine, but there are a couple of adjustments to 18 00:00:56.400 --> 00:00:57.300 take into account. 19 00:00:58.700 --> 00:01:01.700 The first adjustment is that there will be an exceptional dividend 20 00:01:01.700 --> 00:01:04.500 of 6.85 dollars per share, which is 21 00:01:04.500 --> 00:01:08.800 going to be paid to each and every Albertsons shareholders 22 00:01:07.800 --> 00:01:10.400 for each and every share 23 00:01:10.400 --> 00:01:12.300 owned an October 20. 24 00:01:13.200 --> 00:01:16.700 What is a consequent on the stock price of Albertsons the 25 00:01:16.700 --> 00:01:20.300 closing price October 20 is 27.5 26 00:01:19.300 --> 00:01:22.300 dollars. The dividend is 27 00:01:22.300 --> 00:01:25.300 going to be attributed to shareholders but shareholders 28 00:01:25.300 --> 00:01:28.900 who holds a share on a 20th of October on 29 00:01:28.900 --> 00:01:31.700 the 21st of October this writers disappeared. This 30 00:01:31.700 --> 00:01:34.100 is why the opening price on the 21st of 31 00:01:34.100 --> 00:01:37.200 October is 20.65 which is 32 00:01:37.200 --> 00:01:40.700 exactly 27.5 minus the 33 00:01:40.700 --> 00:01:44.800 dividend of 6.85. This is quite straightforward 34 00:01:43.800 --> 00:01:46.100 anytime a company 35 00:01:46.100 --> 00:01:49.300 pass a dividend a stock price is just a downward 36 00:01:49.300 --> 00:01:51.300 by the exact amount of the dividend. 37 00:01:52.300 --> 00:01:55.300 The second adjustment is that there might be 38 00:01:55.300 --> 00:01:58.400 some antitrust requirements about the deal 39 00:01:58.400 --> 00:02:01.500 because Kroger is big and Albertson is 40 00:02:01.500 --> 00:02:04.500 big in North America that might be transformed into 41 00:02:04.500 --> 00:02:07.700 a kind of dominant situation. This is why there will be some potential 42 00:02:07.700 --> 00:02:10.200 spin-offs which are already mentioned by 43 00:02:10.200 --> 00:02:11.000 the company. 44 00:02:12.200 --> 00:02:15.800 When you look at the graph, it's very interesting to observe that 45 00:02:15.800 --> 00:02:18.400 starting from the moment. The acquisition 46 00:02:18.400 --> 00:02:21.100 is announced the stock price of about science is not 47 00:02:21.100 --> 00:02:24.500 going to move that much except of course for the 48 00:02:24.500 --> 00:02:27.600 dividend payment of again, 6.85. 49 00:02:29.100 --> 00:02:32.700 Now when you observe this stock price on October 14, 50 00:02:32.700 --> 00:02:36.000 it was twenty seven dollars after the announcement 51 00:02:35.300 --> 00:02:38.800 of the acquisition. It's still 27 dollars. 52 00:02:39.600 --> 00:02:43.200 But Kroger is offering 34.1 dollars 53 00:02:42.200 --> 00:02:45.700 which represents plus 30% against the 54 00:02:45.700 --> 00:02:46.200 27. 55 00:02:46.800 --> 00:02:49.800 Now today when I record this Vitas 56 00:02:49.800 --> 00:02:52.500 so stock price is 21.4 dollars. 57 00:02:52.500 --> 00:02:55.300 Of course as some inserted about the dividend 58 00:02:55.300 --> 00:02:59.200 spin off the approval by the antitrust authorities 59 00:02:58.200 --> 00:03:00.200 and so on and so forth. 60 00:03:01.600 --> 00:03:04.300 But if you tags in his soul offer, which 61 00:03:04.300 --> 00:03:07.700 is 34.1 you deduct a 6.85 you 62 00:03:07.700 --> 00:03:10.400 get 27.25 when 63 00:03:10.400 --> 00:03:13.300 you compare that with 21.4 is a difference is 64 00:03:13.300 --> 00:03:16.200 5.85. This is quite 65 00:03:16.200 --> 00:03:18.500 a lot for a kind of uncertainty. 66 00:03:19.300 --> 00:03:23.600 Let's go back to Albertsons. What is a business model retail North 67 00:03:22.600 --> 00:03:25.700 America food distribution sales 68 00:03:25.700 --> 00:03:28.300 a bit more than 70 billion in 69 00:03:28.300 --> 00:03:31.400 21 22. They are closing the accounts at 70 00:03:31.400 --> 00:03:34.600 the end of February. They are showing some organic growth 71 00:03:34.600 --> 00:03:37.700 plus nine percent Q2 2022 as 72 00:03:37.700 --> 00:03:41.300 opposed to the same period 2021 quite an 73 00:03:41.300 --> 00:03:44.700 extensive distribution network with 2,200 supermarkets 74 00:03:44.700 --> 00:03:49.200 in the United States and 290,000 employees. 75 00:03:50.300 --> 00:03:53.400 They are number 10 in the US Kroger is number 76 00:03:53.400 --> 00:03:56.300 five, but Kroger is quite close to the number three, 77 00:03:56.300 --> 00:04:00.100 which is Costco and Costco generates 140 78 00:03:59.100 --> 00:04:02.900 billion dollars in the United States. Now, 79 00:04:02.900 --> 00:04:05.400 if you are quite close to the number three and you 80 00:04:05.400 --> 00:04:08.400 buy the number 10, you are going to become number 81 00:04:08.400 --> 00:04:11.400 three and Kroger Plus Albertsons. It represents a 82 00:04:11.400 --> 00:04:14.800 bit more than 200 billion dollars, which 83 00:04:14.800 --> 00:04:17.600 is number three but significantly number three 84 00:04:17.600 --> 00:04:20.900 and just behind number two, which is Amazon retail 85 00:04:20.900 --> 00:04:21.500 in the US. 86 00:04:22.300 --> 00:04:26.100 There's a number one which is Walmart and disputed 87 00:04:25.100 --> 00:04:28.800 number one with 460 billion 88 00:04:28.800 --> 00:04:31.700 dollars, but you understand that Kroger Plus Albertsons. 89 00:04:31.700 --> 00:04:32.700 This is quite big. 90 00:04:33.600 --> 00:04:36.700 And there are 20 batters or most 91 00:04:36.700 --> 00:04:39.200 Safe Way and so on and so forth for 92 00:04:39.200 --> 00:04:42.600 Albertsons bought by Kroger and these Banners 93 00:04:42.600 --> 00:04:45.300 are quite old a banner was created in 94 00:04:45.300 --> 00:04:48.100 1860 shows out of the wine 95 00:04:48.100 --> 00:04:51.800 in 1891 Acme. Joe Albertson 96 00:04:51.800 --> 00:04:55.200 created Albertsons in 1939. 97 00:04:56.400 --> 00:04:59.400 So it's a quite all company which is very 98 00:04:59.400 --> 00:05:02.100 much embedded in the consumers habits, which is 99 00:05:02.100 --> 00:05:05.500 quite a good deal for Kroger. The capital 100 00:05:05.500 --> 00:05:08.600 is located in Boys in Idaho, which is 101 00:05:08.600 --> 00:05:11.000 where Joe Albertsons created Albertsons. 102 00:05:11.500 --> 00:05:14.200 In 2006 the companies acquired by 103 00:05:14.200 --> 00:05:18.300 Consortium of private Equity Funds. Number one Cerberus. 104 00:05:17.300 --> 00:05:20.400 They are buying Albertsons. They 105 00:05:20.400 --> 00:05:22.700 are going to try to make the company grow. 106 00:05:23.400 --> 00:05:27.600 Organic and external growth 2015 thereby Safeway 107 00:05:27.600 --> 00:05:31.300 for 9.4 billion dollars multiplying revenues 108 00:05:30.300 --> 00:05:33.200 by 2 the same year 109 00:05:33.200 --> 00:05:36.100 in October 2015. They plan an IPO, but they have 110 00:05:36.100 --> 00:05:39.900 to withdraw for some reasons, which I'm going to describe later. They 111 00:05:39.900 --> 00:05:42.600 announced the IPO again in 2020, and 112 00:05:42.600 --> 00:05:45.300 it's realized in June 2020. 113 00:05:46.200 --> 00:05:49.600 At the stock price, which is $16 per share. The company 114 00:05:49.600 --> 00:05:52.200 is listed on a NASDAQ. So The Benchmark is going 115 00:05:52.200 --> 00:05:56.100 to be the NASDAQ and when we look at the evolutions stock 116 00:05:55.100 --> 00:05:58.300 price, we realize that at first 117 00:05:58.300 --> 00:06:01.700 it was not a great success up to I would say mid 118 00:06:01.700 --> 00:06:02.700 2021. 119 00:06:03.400 --> 00:06:07.300 Mid 2021 the stock price is skyrocketing much 120 00:06:06.300 --> 00:06:09.900 Beyond this NASDAQ Evolution and 121 00:06:09.900 --> 00:06:12.900 there will be a high point in March April 122 00:06:12.900 --> 00:06:15.800 2022 with 38 123 00:06:15.800 --> 00:06:18.600 dollars per share. Then it goes down the NASDAQ 124 00:06:18.600 --> 00:06:21.200 also and it's going to show over the 125 00:06:21.200 --> 00:06:26.900 period return of 35.4% a 126 00:06:25.900 --> 00:06:28.500 little bit more if you adjust to 127 00:06:28.500 --> 00:06:31.500 the dividend and if you are just as a dividends a shareholders return 128 00:06:31.500 --> 00:06:34.900 is going to be about 70% which is quite okay for 129 00:06:34.900 --> 00:06:37.100 two years. In the meantime. The NASDAQ is 130 00:06:37.100 --> 00:06:40.500 a buy only 6% the good news for the shareholders. 131 00:06:40.500 --> 00:06:43.700 What about the financial Matrix of Albertsons in 132 00:06:43.700 --> 00:06:45.000 its business operations? 133 00:06:45.900 --> 00:06:49.000 Ten years ago the company was quite small two 134 00:06:48.400 --> 00:06:51.700 three billion dollars and no growth. Then 135 00:06:51.700 --> 00:06:54.400 there will be a few Acquisitions including the big one, 136 00:06:54.400 --> 00:06:57.300 which is Safeway in 2015, which is going 137 00:06:57.300 --> 00:07:00.400 to grow the revenue from 30 to 60 billion 138 00:07:00.400 --> 00:07:03.300 dollars doubling the revenue then slow grows 139 00:07:03.300 --> 00:07:06.700 a little bit of acceleration of growth in 2020 and 140 00:07:06.700 --> 00:07:09.700 2021 today. The revenues are about 141 00:07:09.700 --> 00:07:10.900 70 billion. 142 00:07:11.800 --> 00:07:14.200 What about the profitability as far as a 143 00:07:14.200 --> 00:07:17.500 growth margin is concerned. We started at 25% We 144 00:07:17.500 --> 00:07:20.700 are now at 30% which is quite okay for 145 00:07:20.700 --> 00:07:22.000 retail distribution. 146 00:07:22.700 --> 00:07:25.600 Once you have deducted the indirect calls, the 147 00:07:25.600 --> 00:07:28.600 ebit is much lower than that obviously, but when 148 00:07:28.600 --> 00:07:31.500 you look at the evolution of the ebit the current a 149 00:07:31.500 --> 00:07:34.300 bit excluding exceptional item, I have 150 00:07:34.300 --> 00:07:37.600 two 2018. It's quite gloomy. It's 151 00:07:37.600 --> 00:07:41.400 about 1% maximum. Sometimes negative 152 00:07:40.400 --> 00:07:43.900 in 2013 2014. This 153 00:07:43.900 --> 00:07:47.000 is why in 2015. It was probably not 154 00:07:46.100 --> 00:07:49.800 the right moment to leave the company starting in 155 00:07:49.800 --> 00:07:52.700 2019. You have a consistent increase 156 00:07:52.700 --> 00:07:55.300 in a bit and the current image is 157 00:07:55.300 --> 00:07:58.700 more than three percent. It's not outstanding returns here, 158 00:07:58.700 --> 00:08:01.200 but it's retail so not high return on sales. 159 00:08:02.300 --> 00:08:06.100 You remember that the regional say should be multiplied by the assets 160 00:08:05.100 --> 00:08:08.600 to an over to get the return Capital employed. 161 00:08:08.600 --> 00:08:11.500 I set to an over is about property plant and 162 00:08:11.500 --> 00:08:14.700 Equipment, but it's also about the working capital requirement and 163 00:08:14.700 --> 00:08:17.200 a cash conversion cycle inventories. 164 00:08:17.700 --> 00:08:20.900 And receivables minus payables accounts receivable 165 00:08:20.900 --> 00:08:23.700 is quite marginal. We are in retail distribution. People 166 00:08:23.700 --> 00:08:26.600 are paying cash accounts payable. 167 00:08:26.600 --> 00:08:29.600 It's about the months of sales. It's 168 00:08:29.600 --> 00:08:32.400 a bit less for Albertsons, but it's starting 169 00:08:32.400 --> 00:08:35.300 to go up into 2020 and 2021 as in 170 00:08:35.300 --> 00:08:39.200 the meantime, the inventory level is gradually down. You 171 00:08:38.200 --> 00:08:41.200 understand that the cash conversion cycle, which was 172 00:08:41.200 --> 00:08:44.400 quite low in 2019 is going to go down in 173 00:08:44.400 --> 00:08:48.200 his absolutely marginal in 2021. It's 174 00:08:47.200 --> 00:08:49.100 quite straightforward. 175 00:08:49.900 --> 00:08:52.100 Now the question is how many dollars of 176 00:08:52.100 --> 00:08:55.000 revenues do you generate out of one dollar of sales? 177 00:08:55.800 --> 00:08:58.700 In 2016. It's about five dollars 178 00:08:58.700 --> 00:09:01.500 in 2021 is about eight dollars. 179 00:09:01.500 --> 00:09:04.400 So the capital is improving very much its productivity in terms 180 00:09:04.400 --> 00:09:06.900 of revenues per Point of Sales. I would say 181 00:09:07.600 --> 00:09:10.900 now the assets turnovers combination of sales over 182 00:09:10.900 --> 00:09:13.300 property plants and equipment and the cash 183 00:09:13.300 --> 00:09:16.700 conversion cycle parallel to the evolution 184 00:09:16.700 --> 00:09:19.600 of the sales over property plant and equipment is 185 00:09:19.600 --> 00:09:22.300 the evolution of the assets turnover reside the 186 00:09:22.300 --> 00:09:25.500 right of use assets. But you remember that the right of 187 00:09:25.500 --> 00:09:28.400 use assets have to be introduced in the balance sheet 188 00:09:28.400 --> 00:09:31.700 starting in 2019. This is why the actual 189 00:09:31.700 --> 00:09:34.400 assets turnover is lower as 190 00:09:34.400 --> 00:09:37.600 a consequence of accounting for the leases, but if 191 00:09:37.600 --> 00:09:40.200 you look at the assets don't over without the right of 192 00:09:40.200 --> 00:09:43.500 use asset you understand that there is a permanent Improvement in 193 00:09:43.500 --> 00:09:44.400 the productivity. 194 00:09:45.400 --> 00:09:48.500 So basically if the productivity of asset 195 00:09:48.500 --> 00:09:51.100 is up and if the return on sales is there are 196 00:09:51.100 --> 00:09:53.500 two good reasons why the return capital is up? 197 00:09:54.100 --> 00:09:57.600 In 2016 2017 the return capital 198 00:09:57.600 --> 00:09:59.700 is about 5% or less. 199 00:10:00.500 --> 00:10:03.600 Which is not that good in order to list the company 200 00:10:03.600 --> 00:10:06.700 the company's not doing well. Now you have a consistent 201 00:10:06.700 --> 00:10:09.100 improvements in them. And what do You 202 00:10:09.100 --> 00:10:12.200 observe today is excluding the right of use assets. The 203 00:10:12.200 --> 00:10:15.900 return capital and brought in 2021 is 25% The 204 00:10:15.900 --> 00:10:16.600 company's doing well. 205 00:10:17.700 --> 00:10:21.200 In the meantime, the financial structure is improving, but 206 00:10:20.200 --> 00:10:23.800 we start from a very leverage company 207 00:10:23.800 --> 00:10:26.200 in 2019 the year 208 00:10:26.200 --> 00:10:29.900 before they laser company the gearing book gearing 209 00:10:29.900 --> 00:10:32.300 dead divided by book Equity. It's 210 00:10:32.300 --> 00:10:35.000 about six and The Leverage dead divided by 211 00:10:35.200 --> 00:10:38.000 a beta five years of a bit there for that. 212 00:10:38.600 --> 00:10:41.700 Including the right of use financing, but 213 00:10:41.700 --> 00:10:44.800 it's quite big what's going to happen in 2020. 214 00:10:44.800 --> 00:10:47.300 We observe that both figures 215 00:10:47.300 --> 00:10:50.400 are going to go down to four and it is less than three 216 00:10:50.400 --> 00:10:53.900 today. So the evolution of the company is definitely reducing 217 00:10:53.900 --> 00:10:56.500 debt, which is quite good news. But when 218 00:10:56.500 --> 00:10:59.500 we start in 2020 when the company is listed 219 00:10:59.500 --> 00:11:03.400 you understand that the company is still quite leveraged 220 00:11:02.400 --> 00:11:05.400 now a few comments as 221 00:11:05.400 --> 00:11:08.500 the first set of conclusions. This is quite 222 00:11:08.500 --> 00:11:11.800 traditional acquisition Kroger buying Albertsons. 223 00:11:11.800 --> 00:11:14.300 It's a typical story. If a private 224 00:11:14.300 --> 00:11:17.900 Equity Firm consultium which buys develops 225 00:11:17.900 --> 00:11:20.300 tries to improve with some difficulties as 226 00:11:20.300 --> 00:11:23.500 we could observe and then eventually list the 227 00:11:23.500 --> 00:11:26.300 company and there's listing is going to happen when the 228 00:11:26.300 --> 00:11:28.900 looks better and when the market is ready. 229 00:11:29.600 --> 00:11:32.300 Nothing special nothing new Under the 230 00:11:32.300 --> 00:11:35.200 Sun except a very interesting point which is 231 00:11:35.200 --> 00:11:38.500 going to be about relay State now retail distribution 232 00:11:38.500 --> 00:11:42.000 and real estate assets. It's very often a quite attractive combination. 233 00:11:41.100 --> 00:11:44.600 We observe what Tesco was 234 00:11:44.600 --> 00:11:48.100 doing. We observed what Casey know did with mercyles. It's 235 00:11:47.100 --> 00:11:50.400 a holding in a related business 236 00:11:50.400 --> 00:11:53.500 you remember somewhere in Academia. There 237 00:11:53.500 --> 00:11:56.700 is a field which is devoted to a company for which related 238 00:11:56.700 --> 00:12:00.100 was so strategy importance McDonald's when 239 00:11:59.100 --> 00:12:02.700 I compared when McDonald's with Starbucks. 240 00:12:03.400 --> 00:12:06.500 What happens in real life you develop the point 241 00:12:06.500 --> 00:12:09.200 of sales and you own the land? Why do you 242 00:12:09.200 --> 00:12:12.100 own the land because very often there is no alternative. 243 00:12:12.900 --> 00:12:15.600 The Peace of land is located somewhere in 244 00:12:15.600 --> 00:12:18.300 the middle of nowhere and nobody wants to 245 00:12:18.300 --> 00:12:21.100 finance this piece of land whose value is 246 00:12:21.100 --> 00:12:24.700 definitely made of insert the so you have no alternative 247 00:12:24.700 --> 00:12:27.600 but to buy the piece of land and then what 248 00:12:27.600 --> 00:12:31.100 happens what was in the middle of nowhere yesterday is 249 00:12:30.100 --> 00:12:33.300 downtown today or is in the 250 00:12:33.300 --> 00:12:36.800 location which has plenty of value. So you create value 251 00:12:36.800 --> 00:12:39.200 with real estate just as time goes on. 252 00:12:39.800 --> 00:12:42.800 Now these value can also be regarded as 253 00:12:42.800 --> 00:12:45.600 a guarantee that they want to put that in 254 00:12:45.600 --> 00:12:45.900 front of that. 255 00:12:46.900 --> 00:12:49.500 And that's a story now just before 256 00:12:49.500 --> 00:12:52.700 the listing in June 2020. Albertson is 257 00:12:52.700 --> 00:12:56.400 suing convertible preferred stocks, 258 00:12:55.400 --> 00:12:58.300 which are named CPS and 259 00:12:58.300 --> 00:13:01.800 I will use CPS as the acronym the liquidation value 260 00:13:01.800 --> 00:13:04.400 which is a number of convertibles multiplied by 261 00:13:04.400 --> 00:13:07.900 the power value is 1.75 billion 262 00:13:07.900 --> 00:13:08.300 dollars. 263 00:13:09.200 --> 00:13:12.400 Sometimes you issue at the price which is lower than 264 00:13:12.400 --> 00:13:15.700 the par value to attract investors. The actual proceeds are 265 00:13:15.700 --> 00:13:19.900 going to be a bit less than 1.75 1.68 billion 266 00:13:19.900 --> 00:13:22.000 dollars. There will be two classes of 267 00:13:22.600 --> 00:13:25.400 convertible preferred stocks because there are two classes of 268 00:13:25.400 --> 00:13:27.200 stocks at Albertsons. 269 00:13:27.600 --> 00:13:30.900 So there will be the class a convertible preferred 270 00:13:30.900 --> 00:13:33.600 stocks convertible in class A shares 271 00:13:33.600 --> 00:13:36.800 the class A Shares are ordinary shares 272 00:13:36.800 --> 00:13:40.800 with voting right? There will be 340,000 CPS 273 00:13:40.800 --> 00:13:44.200 issued at the par value of 1,000. It's 274 00:13:43.200 --> 00:13:46.700 going to be 340 million dollars 275 00:13:46.700 --> 00:13:49.600 class A1 Shares are the 276 00:13:49.600 --> 00:13:52.700 same as the ordinary shares, but they have no voting rights. The 277 00:13:52.700 --> 00:13:56.600 company's going to issue 1 million 410 Towson 278 00:13:55.600 --> 00:13:57.700 cpss. 279 00:13:58.300 --> 00:14:01.600 At the par value of 1,000 so 280 00:14:01.600 --> 00:14:06.700 it's going to be a liquidation value of 1.410 billion 281 00:14:05.700 --> 00:14:08.500 dollars. If you had a liquidation 282 00:14:08.500 --> 00:14:11.200 value of the class A1 and the class a 283 00:14:11.200 --> 00:14:14.600 convertible preferred stocks, you get the liquidation value 284 00:14:14.600 --> 00:14:17.600 of 1.75 billion. What is 285 00:14:17.600 --> 00:14:20.400 quite interesting is to observe that the 286 00:14:20.400 --> 00:14:23.400 class A1 CPS. I shoot at 287 00:14:23.400 --> 00:14:26.100 the same power value as a Class A and there is 288 00:14:26.100 --> 00:14:30.600 a difference which is the voting right, which is seemingly valued 289 00:14:29.600 --> 00:14:31.100 nothing. 290 00:14:32.500 --> 00:14:36.400 Now, what about the CPS Matrix classical metrics 291 00:14:35.400 --> 00:14:38.200 for a convertible Bond first one 292 00:14:38.200 --> 00:14:41.200 the coupon 6.75% and I 293 00:14:41.200 --> 00:14:45.500 will discuss this coupon a little bit later on a convertible Bond 294 00:14:44.500 --> 00:14:47.300 or preferred stock can be converted 295 00:14:47.300 --> 00:14:50.900 into shares or preferred shares. What 296 00:14:50.900 --> 00:14:53.300 is absolutely phenomato this conversion rate how many 297 00:14:53.300 --> 00:14:57.100 shares you get out of the conversion of one unit 298 00:14:56.100 --> 00:15:01.300 of CPS? The answer is 58.065 299 00:14:59.300 --> 00:15:02.300 shares for one 300 00:15:02.300 --> 00:15:05.300 CPS same conversion rate for a and 301 00:15:05.300 --> 00:15:08.500 A1. Now you can easily calculate the conversion price, 302 00:15:08.500 --> 00:15:11.300 which is a liquidation probably the power value 303 00:15:11.300 --> 00:15:14.400 of the CPS divided by the conversion rate 304 00:15:14.400 --> 00:15:17.100 58.065. And you 305 00:15:17.100 --> 00:15:20.400 get 17.22. It's a 306 00:15:20.400 --> 00:15:23.300 very interesting figure because you understand that is a 307 00:15:23.300 --> 00:15:26.900 stock price goes beyond 17.22. It's 308 00:15:26.900 --> 00:15:29.200 more attractive to convert. If it's less it's more 309 00:15:29.200 --> 00:15:32.200 attractive to get the money back. The issue is 310 00:15:32.500 --> 00:15:35.800 Going to happen on June 9 the listing on 311 00:15:35.800 --> 00:15:38.300 June 25 and the listing is you remember 312 00:15:38.300 --> 00:15:41.400 16. What does it mean at 16 dollars? 313 00:15:41.400 --> 00:15:44.900 It means that there is absolutely no motivation to 314 00:15:44.900 --> 00:15:47.500 convert and get a share which is 315 00:15:47.500 --> 00:15:51.300 worth 16 when the conversion price is 17. 316 00:15:50.300 --> 00:15:53.900 So you're going to wait a convertible 317 00:15:53.900 --> 00:15:56.800 bond is a combination of a bond 318 00:15:56.800 --> 00:15:59.300 and an option. The option is an option 319 00:15:59.300 --> 00:16:01.500 a right to buy. It's a call option. 320 00:16:02.300 --> 00:16:05.700 And you understand that a call option as an intrinsic 321 00:16:05.700 --> 00:16:08.500 value which turns positive if the 322 00:16:08.500 --> 00:16:11.900 value of the underlying asset goes beyond the 323 00:16:11.900 --> 00:16:14.100 exercise price, which is in this case 324 00:16:14.100 --> 00:16:15.300 the conversion price. 325 00:16:16.200 --> 00:16:20.000 So here we have a call which is slightly out of the monac. The 326 00:16:19.300 --> 00:16:22.900 only value of the option is a Time 327 00:16:22.900 --> 00:16:26.100 Value no intrinsic value, very traditional and 328 00:16:25.100 --> 00:16:28.300 classical for a convertible ball. 329 00:16:28.300 --> 00:16:31.300 When are you going to exercise the call which 330 00:16:31.300 --> 00:16:33.400 is invaded in the CPS? 331 00:16:34.300 --> 00:16:37.700 The investor can convert at any time of 332 00:16:37.700 --> 00:16:40.600 course investor is not going to convert when the 333 00:16:40.600 --> 00:16:43.200 option is out of the money. But even when 334 00:16:43.200 --> 00:16:45.100 the option is in the money 335 00:16:45.700 --> 00:16:49.300 The exercise of the call will not happen because a 336 00:16:48.300 --> 00:16:51.200 call as a value which is the intrinsic value 337 00:16:51.200 --> 00:16:54.400 and the time value the day you exercise are called 338 00:16:54.400 --> 00:16:57.000 you eliminate the time value. So, of course 339 00:16:57.300 --> 00:17:01.100 you're going to delay as much as possible the conversion, especially 340 00:17:00.100 --> 00:17:05.000 when the coupon is quite High 6.75% 341 00:17:06.200 --> 00:17:09.200 That's is your can but as no obligation to 342 00:17:09.200 --> 00:17:12.200 do it, this is very important to redeem the bond. 343 00:17:13.400 --> 00:17:16.300 Six years after the issue June 9 344 00:17:16.300 --> 00:17:19.500 2026 at 105% of 345 00:17:19.500 --> 00:17:22.900 the liquidation value. Of course. It's a 346 00:17:22.900 --> 00:17:25.200 stock price of Albertsons is more than 347 00:17:25.200 --> 00:17:28.800 105% of 17.22, which 348 00:17:28.800 --> 00:17:32.100 is the conversion price. Then the 349 00:17:31.100 --> 00:17:34.500 investors are going to convert because they 350 00:17:34.500 --> 00:17:37.400 are going to avoid the Redemption. They prefer 351 00:17:37.400 --> 00:17:40.300 to have stocks rather than cash. This is for 352 00:17:40.300 --> 00:17:43.300 the Redemption which might take place six years after the issue. 353 00:17:44.100 --> 00:17:47.400 But there are some also closest one is a possible 354 00:17:47.400 --> 00:17:50.900 mandatory conversion by the issue by 355 00:17:50.900 --> 00:17:53.800 Albertson if the price if the 356 00:17:53.800 --> 00:17:56.600 stock price exceeds 20.5 US Dollars 357 00:17:56.600 --> 00:17:59.800 during minimum 20 days consecutive or 358 00:17:59.800 --> 00:18:02.600 20 days with zero period of 30 days after 359 00:18:02.600 --> 00:18:05.500 June 2023, so three years 360 00:18:05.500 --> 00:18:06.700 after the issue. 361 00:18:07.300 --> 00:18:10.600 If you compare 20.5 and 17.22 it's 362 00:18:10.600 --> 00:18:13.200 plus 19% which is a quite 363 00:18:13.200 --> 00:18:16.400 low premium for the investor. And then 364 00:18:16.400 --> 00:18:20.100 you force the investor to convert when 365 00:18:19.100 --> 00:18:22.500 the incinerator of return. I may 366 00:18:22.500 --> 00:18:25.700 say is 19% That's not very exciting. This is 367 00:18:25.700 --> 00:18:28.600 why this false conversions limited to one third 368 00:18:28.600 --> 00:18:29.300 of the CPS. 369 00:18:30.200 --> 00:18:33.300 And the cap will disappear if the price is more than 370 00:18:33.300 --> 00:18:36.200 23.42 per share. 371 00:18:36.200 --> 00:18:40.100 Then the premium is not nineteen percent is 33% 372 00:18:39.100 --> 00:18:42.600 but it's still forced conversion 373 00:18:42.600 --> 00:18:45.200 because the date happens you understand 374 00:18:45.200 --> 00:18:48.300 that you eliminate the time value of the option and you're capping 375 00:18:48.300 --> 00:18:51.600 the return for the investors, which is not exactly good news. 376 00:18:51.600 --> 00:18:54.700 But disclose very often shows in the perspectives 377 00:18:54.700 --> 00:18:55.800 of convertible bones. 378 00:18:56.700 --> 00:18:59.800 Pros and cons of his suing convertible is 379 00:18:59.800 --> 00:19:02.600 very well known for these viewer. It's about delusion 380 00:19:02.600 --> 00:19:05.500 and delusion and delusion your postpone and 381 00:19:05.500 --> 00:19:08.200 your reducer dilution Saigon good 382 00:19:08.200 --> 00:19:11.200 news for the issuer joy speaking the interest rate. The 383 00:19:11.200 --> 00:19:14.700 coupon is lower. It's not going to be the case for Albertsons and 384 00:19:14.700 --> 00:19:16.800 I will elaborate on that in a queue minutes. 385 00:19:17.600 --> 00:19:20.600 But there is a mixed feeling about the 386 00:19:20.600 --> 00:19:23.800 signal because there's an uncertainty about 387 00:19:23.800 --> 00:19:26.600 the actual stock price increase the 388 00:19:26.600 --> 00:19:29.100 day you issue convertible. If you are quite sure 389 00:19:29.100 --> 00:19:32.500 that the stock price is going to be multiple by two the alternative 390 00:19:32.500 --> 00:19:35.400 would be to issue straight Bond and then 391 00:19:35.400 --> 00:19:38.300 repay the straight bonds is suing shares at 392 00:19:38.300 --> 00:19:41.300 the merge higher price further reducing the 393 00:19:41.300 --> 00:19:44.200 delusion. So you are quite sure that it's 394 00:19:44.200 --> 00:19:47.300 going to be up. This is why you issue convertible balls, but 395 00:19:47.300 --> 00:19:50.100 you're not that sure this is why you wish you convertible bonds. 396 00:19:50.900 --> 00:19:52.200 Understand mixed feeling about that. 397 00:19:53.100 --> 00:19:56.800 The investor is speculating definitely on a 398 00:19:56.800 --> 00:19:59.100 stock price increase. We hope there will 399 00:19:59.100 --> 00:20:02.400 be conversion. But if there is no conversion, we 400 00:20:02.400 --> 00:20:05.400 have a parachute there's a parachute which 401 00:20:05.400 --> 00:20:08.400 means we can be repaired in cash the liquidation 402 00:20:08.400 --> 00:20:10.500 sometimes plus a premium. 403 00:20:11.200 --> 00:20:15.200 There will be the capital reduction if and 404 00:20:14.200 --> 00:20:17.500 if is going to be elaborated in a 405 00:20:17.500 --> 00:20:18.100 couple of slides. 406 00:20:18.900 --> 00:20:22.000 Before I deep dive into the if I 407 00:20:21.200 --> 00:20:24.500 would like to make some comments on the 408 00:20:24.500 --> 00:20:27.600 metrics of the CPS. The most important 409 00:20:27.600 --> 00:20:30.100 one is a coupon in this case, 410 00:20:30.100 --> 00:20:33.200 which is 6.75% What is 411 00:20:33.200 --> 00:20:36.300 a rating of Albertsons when the 412 00:20:36.300 --> 00:20:39.800 issue takes place standout pools is provided a rating 413 00:20:39.800 --> 00:20:42.500 of B, B minus Double B minus 414 00:20:42.500 --> 00:20:46.300 which turn into Double B into 2021 you 415 00:20:45.300 --> 00:20:48.900 speculative grade, but it's not dramatic 416 00:20:48.900 --> 00:20:51.200 Moody's be a tour today, which 417 00:20:51.200 --> 00:20:54.500 is the equator Double B for S&P because they 418 00:20:54.500 --> 00:20:58.500 have the same opinion about the probability of default of the company speculative 419 00:20:57.500 --> 00:21:01.000 grade high yield that and 420 00:21:00.100 --> 00:21:03.500 that's it. So for this category of 421 00:21:03.500 --> 00:21:06.700 Bones the normal historical spread should 422 00:21:06.700 --> 00:21:10.100 be between 3% to 4% at 423 00:21:09.100 --> 00:21:12.400 the long term born Ray garment born 424 00:21:12.400 --> 00:21:16.600 Ray T-Bone in June 2020 is 0.7% quite 425 00:21:15.600 --> 00:21:18.200 low at that time the 426 00:21:18.900 --> 00:21:21.900 More cards coupon should be 0.7 plus 427 00:21:21.900 --> 00:21:24.600 3 to 4% Okay. It's a 428 00:21:24.600 --> 00:21:27.400 range of four to five percent. Certainly not 429 00:21:27.400 --> 00:21:29.400 6.75% 430 00:21:30.200 --> 00:21:34.000 So it's a quite High coupon then you 431 00:21:33.100 --> 00:21:36.600 can question the reason of these high coupon. 432 00:21:37.100 --> 00:21:40.100 One of the reasons is a use of proceeds of 433 00:21:40.100 --> 00:21:44.100 the CPS the day you issue Equity or quasiquity very 434 00:21:43.100 --> 00:21:46.500 often. How do you use the money 435 00:21:46.500 --> 00:21:47.800 you represent that? 436 00:21:48.500 --> 00:21:51.700 You remember the level of debt? The net Financial rate 437 00:21:51.700 --> 00:21:54.700 in 2019 is six times the equity in five times. The 438 00:21:54.700 --> 00:21:58.100 proceeds are going to be about 1.7 billion. 439 00:21:57.100 --> 00:22:00.200 What is going to be the use 440 00:22:00.200 --> 00:22:03.100 of this money returning cash to shareholders through share by 441 00:22:03.100 --> 00:22:07.000 back 1.9 billion impact of adaptedness. Do 442 00:22:06.200 --> 00:22:09.100 you reduce that? No, no impact on the 443 00:22:09.100 --> 00:22:10.400 level of financial debt. 444 00:22:11.200 --> 00:22:14.300 And of course we are going to observe a reduction in the gearing 445 00:22:14.300 --> 00:22:17.200 and in leverage, but it's only the free cash flows of 446 00:22:17.200 --> 00:22:20.700 2020 and 2021 which are going to contribute to the 447 00:22:20.700 --> 00:22:23.400 reduction in the financial leverage of 448 00:22:23.400 --> 00:22:26.200 the family. That's a bet the moment. The 449 00:22:26.200 --> 00:22:28.100 company is issuing the CPS. 450 00:22:29.300 --> 00:22:32.500 This is why probably one of the reasons why 451 00:22:32.500 --> 00:22:34.500 at least the coupon is quite High. 452 00:22:35.300 --> 00:22:37.800 now, let's go back to parachute if 453 00:22:38.900 --> 00:22:42.100 if you don't convert it's 454 00:22:41.100 --> 00:22:44.200 because the stock price is not doing well 455 00:22:44.200 --> 00:22:47.200 to stock price is stable or down and 456 00:22:47.200 --> 00:22:49.900 what does it means that the company is not doing so well. 457 00:22:50.700 --> 00:22:53.500 Then if you ask for cash against your 458 00:22:53.500 --> 00:22:56.500 bones, the question is as a company 459 00:22:56.500 --> 00:22:59.200 is a financial ability to redeem the capital of 460 00:22:59.200 --> 00:22:59.900 the bond. 461 00:23:00.500 --> 00:23:03.300 And you remember that the process of the issue 462 00:23:03.300 --> 00:23:06.200 was not to keep cash somewhere to reduce that to return 463 00:23:06.200 --> 00:23:09.200 the cash to shareholders. Do you understand 464 00:23:09.200 --> 00:23:12.500 that there might be a default is your liquidity 465 00:23:12.500 --> 00:23:13.200 issue? 466 00:23:13.700 --> 00:23:16.600 This is why very often in the convertible issues. 467 00:23:16.600 --> 00:23:19.800 There is a close all we can redeem the bonds in 468 00:23:19.800 --> 00:23:22.800 cash or in shares but does it mean if for 469 00:23:22.800 --> 00:23:25.800 example the stock price ten dollars and the Redemption 470 00:23:25.800 --> 00:23:28.500 price is $20, you can give 20 dollars in 471 00:23:28.500 --> 00:23:31.300 cash or you can provide to shares which is 472 00:23:31.300 --> 00:23:34.600 very much appreciated by the investors. The 473 00:23:34.600 --> 00:23:37.500 Desert Star price is collapsing. This is 474 00:23:37.500 --> 00:23:40.300 what a person with the CPS. It's proposing 475 00:23:40.300 --> 00:23:42.300 an alternative, which is quite interesting. 476 00:23:42.900 --> 00:23:45.300 The CPS olders they will also 477 00:23:45.300 --> 00:23:48.900 have and pay for that 28.2 million 478 00:23:48.900 --> 00:23:51.700 dollars and all the call another option 479 00:23:51.700 --> 00:23:55.000 the right to convert their CPS into special 480 00:23:54.900 --> 00:23:58.300 purpose entities owned by 481 00:23:58.300 --> 00:24:02.000 Albertsons, which detain real estate assets and 482 00:24:01.200 --> 00:24:04.800 they also have the possibility to convert the cpss 483 00:24:04.800 --> 00:24:07.900 in the real estate assets themselves. 484 00:24:07.900 --> 00:24:11.100 And this is quite interesting then 485 00:24:10.100 --> 00:24:13.500 if you hold a CPS, what can 486 00:24:13.500 --> 00:24:16.400 you do you can convert into Albertsons shares, but 487 00:24:16.400 --> 00:24:19.300 you can also convert into shares all these 488 00:24:19.300 --> 00:24:22.600 special purpose entities. You have a double conversion, right? 489 00:24:23.700 --> 00:24:26.400 This second conversion right will be 490 00:24:26.400 --> 00:24:30.300 allowed under very specific conditions the 491 00:24:29.300 --> 00:24:32.500 first condition for the exercise of the 492 00:24:32.500 --> 00:24:35.300 call is if the convertible preferred stocks 493 00:24:35.300 --> 00:24:39.400 are not converted on June 9 2027. So 494 00:24:39.400 --> 00:24:42.800 one year after the ability of Albertsons 495 00:24:42.800 --> 00:24:45.900 to redeem the convertible preferred stocks. 496 00:24:45.900 --> 00:24:49.000 So there's one year during which Albertsons 497 00:24:48.200 --> 00:24:51.500 as a flexibility to redeem or not. If 498 00:24:51.500 --> 00:24:54.600 they don't redeem the CPS, then the CPS 499 00:24:54.600 --> 00:24:56.800 holders of the right to exercise a call. 500 00:24:57.900 --> 00:25:00.300 The second condition is if four years 501 00:25:00.300 --> 00:25:03.300 after the listing of the company's a stock price is 502 00:25:03.300 --> 00:25:08.400 still lower than the conversion price. You remember 17.22. The 503 00:25:07.400 --> 00:25:10.400 third one is it's a rating of the 504 00:25:10.400 --> 00:25:13.800 companies collapsing down to B1, which means that the company's 505 00:25:13.800 --> 00:25:16.200 getting closer and closer to default and 506 00:25:16.200 --> 00:25:19.500 bankruptcy. The fourth one is if Albertson cannot pay 507 00:25:19.500 --> 00:25:23.500 the coupon and doesn't pay the coupon to the CPS holders, 508 00:25:23.500 --> 00:25:26.300 which is again close to the phone. And the fifth one 509 00:25:26.300 --> 00:25:29.600 is if ACI if adults goes 510 00:25:29.600 --> 00:25:32.900 bankrupt now, you are the right to convert into shares 511 00:25:32.900 --> 00:25:35.300 of companies which detain real estate 512 00:25:35.300 --> 00:25:38.600 assets. But what are the financial characteristics of 513 00:25:38.600 --> 00:25:39.900 this real estate assets? 514 00:25:40.600 --> 00:25:43.700 Initially the value must be more than 515 00:25:43.700 --> 00:25:46.200 100 65% of 516 00:25:46.200 --> 00:25:48.400 the liquidation value of the CPS. 517 00:25:49.100 --> 00:25:52.800 Which is much more than 100% which constitutes a 518 00:25:52.800 --> 00:25:55.900 kind of buffer if there is a related crisis and 519 00:25:55.900 --> 00:25:59.500 it is also a motivation for Albertsons 520 00:25:58.500 --> 00:26:02.700 to avoid CPS converting into 521 00:26:02.700 --> 00:26:05.100 the SPs shares and 522 00:26:05.100 --> 00:26:07.900 converting and by the real estate assets. 523 00:26:08.700 --> 00:26:11.600 These are Albertsons operating assets points 524 00:26:11.600 --> 00:26:15.200 of sales. Okay shops supermarkets. Now 525 00:26:14.200 --> 00:26:17.600 when you put the supermarkets in 526 00:26:17.600 --> 00:26:19.300 a special purpose entity. 527 00:26:20.200 --> 00:26:24.100 The supermarket is going to be at the disposal of Albertsons as 528 00:26:23.100 --> 00:26:26.200 an operations with a 529 00:26:26.200 --> 00:26:29.400 rental agreement. There is a lease agreement and there will be a master 530 00:26:29.400 --> 00:26:32.400 lease agreement which manages the entire 531 00:26:32.400 --> 00:26:35.500 relationship between these real estate assets and Albertsons as 532 00:26:35.500 --> 00:26:36.000 a company. 533 00:26:36.900 --> 00:26:39.200 In the Master Lee's agreement. There would be a first 534 00:26:39.200 --> 00:26:42.800 rant you remember the value which is one house 65% 535 00:26:42.800 --> 00:26:47.300 The first rent is going to be 179.4 million 536 00:26:46.300 --> 00:26:49.900 dollars for the first rent adjustment by 537 00:26:49.900 --> 00:26:52.700 fair market Price, which is quite straightforward. 538 00:26:53.300 --> 00:26:56.300 And if the call is exercised if 539 00:26:56.300 --> 00:27:00.000 the conversion is exercise, the duration 540 00:26:59.200 --> 00:27:02.100 of the lease Agreements are going to be a 541 00:27:02.100 --> 00:27:05.600 justice so that it is 20 years starting when the moment 542 00:27:05.600 --> 00:27:09.200 of the exercise when the exercise occurs. So 543 00:27:08.200 --> 00:27:12.400 you understand that you have a kind of double trigger safety 544 00:27:11.400 --> 00:27:15.000 net for the orders of 545 00:27:14.100 --> 00:27:17.900 the CPS, which is quite interesting 546 00:27:17.900 --> 00:27:20.600 because we can build plenty 547 00:27:20.600 --> 00:27:23.900 of scenarios out of that. For example, if Albertsons stock 548 00:27:23.900 --> 00:27:25.900 price is rapidly getting up. 549 00:27:26.600 --> 00:27:29.700 They are going to exercise their right of mandatory 550 00:27:29.700 --> 00:27:30.800 reinforce conversion. 551 00:27:31.600 --> 00:27:34.300 But as there is a high coupon, of course, 552 00:27:34.300 --> 00:27:37.400 they are going to be very motivated to 553 00:27:37.400 --> 00:27:40.400 force conversion because today the coupon is 554 00:27:40.400 --> 00:27:43.600 so much higher than what they should pay under normal 555 00:27:43.600 --> 00:27:46.600 circumstances. So they will accelerate the 556 00:27:46.600 --> 00:27:48.600 conversion if they have the possibility to do it. 557 00:27:49.400 --> 00:27:52.500 But imagine that Albertsons stock price does not reach a 558 00:27:52.500 --> 00:27:55.700 conversion price 17 points something and that 559 00:27:55.700 --> 00:27:59.500 person does not force a conversion and exercise or 560 00:27:58.500 --> 00:28:01.600 right to redeem after six years the 561 00:28:01.600 --> 00:28:04.500 investors one year later. They can't convert 562 00:28:04.500 --> 00:28:07.200 into a real estate board for you which is 563 00:28:07.200 --> 00:28:10.700 made of equities of the assets inside the equities 564 00:28:10.700 --> 00:28:13.900 whose value May significantly exceed the 565 00:28:13.900 --> 00:28:17.000 conversion price. So that's motivated conversion 566 00:28:16.200 --> 00:28:19.400 by Albertsons. You can build any 567 00:28:19.400 --> 00:28:22.800 scenario you want. This is an extremely interesting process. 568 00:28:22.800 --> 00:28:25.500 What we are observing here is a 569 00:28:25.500 --> 00:28:28.400 financial engineering which goes much Beyond 570 00:28:28.400 --> 00:28:31.200 Simple what we name hybrid dead 571 00:28:31.200 --> 00:28:34.700 a hybrid that is a very simple born 572 00:28:34.700 --> 00:28:37.800 convertible into death. That's fine 573 00:28:37.800 --> 00:28:40.200 and it works very well, but now it's 574 00:28:40.200 --> 00:28:44.000 much more soft together because we can observe a direct 575 00:28:43.300 --> 00:28:47.300 right on the cooperate operating assets 576 00:28:46.300 --> 00:28:48.700 this sophisticated. 577 00:28:49.300 --> 00:28:52.700 Your engineering is named by some academic and professionals 578 00:28:52.700 --> 00:28:53.700 decority. 579 00:28:54.300 --> 00:28:57.400 And this one word the equity you have that and 580 00:28:57.400 --> 00:29:00.500 equity and it shows that both are very 581 00:29:00.500 --> 00:29:03.200 much and better into each other degrity is 582 00:29:03.200 --> 00:29:08.200 generally used for project Finance utilities energy. 583 00:29:06.200 --> 00:29:09.100 And so on. This is 584 00:29:09.100 --> 00:29:12.200 about private financing and we don't have much of the 585 00:29:12.200 --> 00:29:15.700 information. It's more rarely useful public financing 586 00:29:15.700 --> 00:29:18.400 so financing for listed firms, 587 00:29:18.400 --> 00:29:21.300 and this is a case for Albertson. This is why 588 00:29:21.300 --> 00:29:24.600 we have all the figures we have hand readers of 589 00:29:24.600 --> 00:29:27.900 pages of Financial and legal engineering which 590 00:29:27.900 --> 00:29:30.400 makes these issue extremely interesting 591 00:29:30.400 --> 00:29:33.600 to observe. I hope you've been interested by 592 00:29:33.600 --> 00:29:35.700 this case. Thank you very much.