„We no longer need a rating“
Mr. Langer, the market environment could hardly be better for the Douglas IPO. The Dax is climbing to new highs almost on a daily basis. Nevertheless, you still need the financial support of your existing shareholders in the form of fresh equity for the IPO. Please explain the structure.
Immediately before the IPO, we will receive equity of up to 300 million euros from our owner, Kirk Beauty International. This is a very clear signal from our shareholders. They are supporting us in achieving a target debt level of significantly less than three times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, editor's note) at the start of the IPO.
Can you not raise more equity on the market?
Thanks to the additional equity injection of around 300 million euros from our existing shareholders, this is not necessary. In order to reduce our debt by around 1.1 billion euros as planned, we only need around 800 million euros in net proceeds on the market. In the event of a successful IPO, the existing debt financing will be completely redeemed at significantly more favorable conditions.
Early repayment will incur early repayment interest. How much will this cost you?
We have made corresponding agreements in our existing loan agreements. The prepayment penalties for the PIK Notes and the Senior Secured Notes amount to a total of just under 30 million euros. This is a reasonable investment. The PIK Note is not a suitable financing instrument for a company with a net leverage ratio of less than 3.
How big is the annual interest saving?
We are currently paying an average of 8% on our financial liabilities. In future, we expect average interest costs to be between 5.5% and 6.5%. Our debt will be reduced by a substantial 1.1 billion euros and, as I said, we will pay 150 to 250 basis points less interest on the remaining debt.
You have a very weak rating of „B-“ or „B3“. You are aiming for a leverage ratio of 2.7 for the IPO. What does that mean for the rating?
We are completely replacing the existing financing and are substituting it with completely new financing that is more suitable for the new situation. The new financial liabilities amount to 1.6 billion euros. This is a combination of a term loan, a bridge loan and a revolving credit facility. Because we are not using capital market-listed instruments, we no longer need a rating. We have not yet decided how we will continue with the existing ratings.
Why are you unnecessarily restricting your room for manoeuvre by foregoing a rating?
A new bond would have been more expensive for us than the new term loan. In principle, we appreciate having options. That's why I don't want to rule out the possibility of us returning to the bond market at a later date.
You want to reduce net debt in relation to the adjusted EBITDA to 2 in the medium term. What do you mean by medium-term in this context?
We have deliberately kept this open because we do not want to commit ourselves to a specific fiscal year.
To secure the transaction, some companies have relied on anchor investors who commit to subscribing to a block of shares before the IPO. Your offer also includes private placements. Will there be pre-placements at Douglas?
We have submitted the intention to float and discussions are now taking place with investors. So far, no agreement has been reached with an anchor investor.
Would you go along with that?
An anchor investor brings certain advantages; we are therefore open to anchor investors. However, such an investor is not a prerequisite for a successful IPO of Douglas.
Your owners will presumably borrow the money for the capital injection from a bank. Such loans are usually collateralized with shares in the IPO candidate. What does this mean for Douglas?
I can't say in detail what the refinancing on the part of the shareholders will look like. What we do know is that the financing is indeed collateralized with Douglas shares, as is usual for such a margin loan.
However, this is not entirely without importance for you, as the free float after the IPO is unlikely to be particularly large due to the additional capital injection. Can you give us an indication?
We are raising net proceeds of around 800 million euros with the capital increase. We will only know the composition of the free float at the end of the marketing process. In my experience, the most important thing for institutional investors is how large the free float market capitalization is. Around 800 million euros in net proceeds is already a relatively high figure.
The lower the free float, the greater the share surplus. This usually caps the share price performance because it is not clear when the financial investor will put shares on the market.
From my own experience, I can say that this is not necessarily the case. In the case of other listed companies that were initially majority-owned by financial investors, such as Hugo Boss, for example, the financial investor has gradually withdrawn over a longer period of time. Anyone who did not get enough shares at the IPO had an interest in buying more. Demand was always high. Every investor knows that CVC will reduce its position in the medium term.
The tank transmission manufacturer Renk recently had a very successful IPO. This was also due to the fact that armaments shares are currently in high demand. Retail, on the other hand, is not such a big hit in the current economic context. Why is this not the case for Douglas?
Welcome to the premium beauty market. The sector is outstanding compared to other retail segments in Europe. We have looked very closely at our market in comparison to other retail sectors in Europe. There is hardly any other retail sector with comparable structural profitability. This applies to both the brand and the retailer side.
Why is that?
Most premium manufacturers only sell to selected retailers, especially in continental Europe. These manufacturers place very high demands on the quality of their points of sale and the qualifications of their sales staff. This is the concept of selective distribution. Market studies show that the sector will grow by an average of 5.4% annually over the next few years. This makes the premium beauty segment very different from many other retail sectors.
Doesn't the economic environment play a role at all?
We grew by 10% in 2023 and increased our profitability by 50 basis points. We are continuing to grow strongly, even if growth is slowly normalizing. We are also growing with new openings. We want to continue that. The machine is running on all cylinders to deliver exactly what we promised. I don't see any obstacles to our medium-term goals in terms of the market environment.
Meet the person
Mark Langer, CFO of Douglas since May 2021, is an old hand at his job. However, the IPO is also new territory for the former CFO and CEO of Hugo Boss. The graduate business economist and mechanical engineer began his professional career in 1995 as a consultant at McKinsey.
