Falic Group targets World Duty Free; ‘We’re very keen and committed’ – Leon Falic – 10/01/08
Source: ©The Moodie Report
By Martin Moodie
UK/US. The Falic Group, owners of Duty Free Americas, announced today in an interview with The Moodie Report that it is preparing to launch a major bid for World Duty Free, the BAA-retail subsidiary put up for sale last month.
“We are very serious about this and our finances are in place for a substantial bid amount,” Duty Free Americas President Leon Falic said.
The family-owned group bought World Duty Free Americas (now Duty Free Americas) from BAA in 2001 and has since flourished, winning a number of big airport concessions in the US – notably Miami International Airport – and driving a strong business on the country’s land border crossings with Mexico and Canada respectively.
The Falic family also acquired the Christian Lacroix fashion house from LVMH in 2005, and the Hard Candy and Urban Decay beauty brands in 2002. In January 2007 wholly owned subsidiary Falic Fashion Group struck a licensing agreement with Perry Ellis International to manufacture and distribute fragrances, toiletries and cosmetics under the Perry Ellis brand in a US$63 million deal.
But now the group is preparing for its biggest plunge in the market yet. As previously reported, first round bids for World Duty Free close next week with most analysts projecting a sale price in excess of £400 million (US$785 million), possibly reaching as high as £500 million (US$980 million). A deal is expected to be completed by the end of the first quarter. [UPDATE: A source at BAA told Reuters today that "around 15 international groups" have expressed interest, adding, "we hope that the process will end towards the end of March".
Leon Falic: "We’re not usually the lowest bidders on things we really want. We will bid what it’s worth."
“We’re very clear and very committed about this project,” Leon Falic told The Moodie Report in a telephone interview early this morning London time.
He revealed that the company has raised a US$1.2 billion war chest for acquisitions in the travel retail and luxury sectors. It has earmarked a substantial proportion of that sum for World Duty Free, though Falic cautioned that the company would not overbid for any business.
“We won’t make an acquisition unless it makes sense and the business will make money for us,” he said. “We might not use a single Dollar of that amount or we might use all of it for acquisitions. It depends on what comes up.”
What has come up is World Duty Free, together with the retailer’s contracts at seven BAA-owned airports – London Heathrow, Gatwick and Stansted, as well as Southampton in the south of England and Aberdeen, Glasgow and Edinburgh in Scotland.
As previously reported, the sale will offer 12-year contracts across the portfolio with an average concession fee “no lower than 31%” of gross sales. That makes for a highly attractive target, especially given that Heathrow and Gatwick are among the world’s leading duty free sales locations.
Falic said the company is convinced it can realise some upside in the World Duty Free business, despite the likelihood that passenger growth across the BAA airports will be modest – BAA announced yesterday a +1.6% year-on-year rise in passenger numbers for 2007 – and the fact that its duty free retail operation is already highly professional.
“We are not talking emergent market passenger growth rates of +15-20% here,” Falic said. “It will be steady. The stores look good and the duty free business is in good shape. Management are doing a good job and it’s run very well.”
However, he added, the family sees opportunities to improve the operation “that maybe others see and maybe they don’t”.
Duty Free Americas, owned by the Falic brothers, has been the 21st century surprise package of the travel retail sector
Leon Falic said it was highly unusual for he and his brothers Simon and Jerome to take a single flight to a location to examine an acquisition opportunity. But that’s exactly what they did this week in London – “that shows how interested and committed we are” he said.
While keeping his bidding cards close to his chest for obvious reasons, Falic said the company would bid aggressively but sensibly.
He cited Duty Free Americas’ decision last May to walk away from what it considered an overbid situation at Tocumen International Airport in Panama. “I live there [in Panama] so it was hard to walk away.” But, he said, there was no exclusivity – “which is key” – and the business went for “way more” than the family thought it was worth.
“We will go after what we want, but we are a private company and we don’t need our egos or our stock price inflated,” he explained.
But he confirmed that the Falic family saw World Duty Free as a great opportunity. “It’s a very concentrated business compared to some of the US airports we run… the layout gives you an opportunity to do a lot more than we can in those airports.”
The flip side though was the significant level of retail and other consumer services competition in BAA’s airports to a World Duty Free offer focused on core categories – liquor, tobacco, fragrances & cosmetics and confectionery.
Nevertheless, the Falic Group likes what it sees. Importantly, the contract tenure will be healthy, allowing the opportunity to reinvest and build the business. In such circumstances the company is clearly prepared to put its money where its mouth is.
Falic drew an analogy with the highly competitive duty free bid at Miami International Airport, where the company triumphed in a tough race against Dufry, Brasif and The Nuance Group/DFASS with a US$20 million annual guarantee in mid-2005. “We wanted it so we went after it. We’re not usually the lowest bidders on things we really want. We will bid what it’s [World Duty Free] worth.”
The Group is likely to face strong competition from fellow trade players – Autogrill, Dufry and Lagardère Services (Aelia, HDS Retail) are likely front-runners – as well as private equity groups, and senior World Duty Free management.
But Falic said he believed the victor will be an established travel retailer. “I think the airport owner [Ferrovial, which heads the consortium that owns BAA –Ed] wants it to go to an operator,” he said. “Duty free is a service business… this has to go to someone who can improve the service quality at the airports.”
He added: “The [31%] royalty can mean a little or a lot. They need someone to come in and do a great job. If I owned the airports that would be a key factor. If you make the right decision and bring in the right operator who really services the airports it can be tremendous for both [parties]… it’s a marriage.”
He said he admired the Ferrovial acquisition of BAA, refuting any suggestions that the Spanish group had overpaid for the UK airport operator. “It was an extremely smart and very astute acquisition. I admire them for what they did. They did not overpay… you cannot build or buy [a similar group] for what they paid.”
Can the Falic Group find both a financial and qualitative upside out of the acquisition? Leon Falic is in no doubt. “It’s a quality operation and the stores look good and the product presentation is good. So I don’t see many negatives. Can I improve it? Remember we operate as [family] owners. We are there personally, looking at every little thing… from buying to merchandising. So do I think our personal touch will help? Yes I do, I really do. Someone who is not in this business cannot improve it. An operator – a good operator – can.”
He pledged his personal commitment and that of his brothers if the Group succeeds in landing the business. “I might develop an English accent by the time I’m finished,” he laughed. “My brothers and I will dedicate a lot of time and attention to the business if we get it.
“This one fits and we’ll put our best foot forward. It will be very competitive and a lot of people will want it. May the best man win.” Can the Falic Group really add value to World Duty Free? “I know we will. We won’t stop until we do. This bid is being done through the Falic Group… so our name is on it.”
RECENT SOUNDBITES FROM THE MOODIE REPORT ON THE FALIC GROUP
LIKELY CANDIDATES TO BUY WORLD DUTY FREE – 4/12/07: The Falic family-owned Duty Free Americas is no stranger to big acquisitions.
DUTY FREE AMERICAS UNDERLINES AMBITIONS WITH URIOSTE ROLE AND VENETIAN OPENING – 04/09/07: Yesterday’s appointment of Enrique Urioste as the new President of Duty Free Americas’ Airport Division underlined the company’s ambitions for the second time in a week, following the opening of its new retail offer at the Venetian Macao-Resort-Hotel.
Duty Free Americas, owned by the Falic brothers – Leon, Jerome and Simon – has been the 21st century surprise package of travel retail. It entered the channel by acquiring World Duty Free Americas in 2001 (on 11 October, just days after the 9/11 terrorist tragedies in the US) from BAA and met initially widespread scepticism from many in the industry due to its previous involvement in the US domestic discounting scene.
In just under six years since it has proved the sceptics wrong, gradually expanding its dominant position in the US airport and border market, entering Latin America and, this year, making its first foray into Asia at the Venetian.
FULL BACKGROUND ON THE WORLD DUTY FREE SALE
World Duty Free deadline nears as trade and private equity interest intensifies – 04/01/08
World Duty Free sale is announced – 04/12/07
Putting a value on World Duty Free – 22/11/07
Civil Aviation Authority clears hurdles, sets framework for World Duty Free sale – 20/11/07