Morningstar DBRS Comments on Elis S.A.'s Interest in Acquiring Vestis Corporation and the Potential Impact

We noted that last week, Elis S.A. (Elis or the Company; rated BBB with a Stable trend) confirmed its interest in acquiring U.S.-based workwear company, Vestis Corporation (Vestis). This potential transaction would be transformative for Elis-both strategically, as it would open the door to the largest and most lucrative market in the world, and financially, potentially entailing higher leverage given the size of the target; as of 6 September 2024, Vestis had an enterprise value (EV) of USD 3.5 billion compared with Elis' EV of USD 9.2 billion.

At this stage, it is too early to comment on any credit rating impact for Elis as there is no certainty the acquisition will take place. Furthermore, the Company has not yet defined the transaction price or the financing mix. Nevertheless, we see some potential improvements for Elis' Business Risk Assessment in key factors such as:

(1) Diversification, in particular geographic diversification because the new U.S. and Canadian markets would represent around one-third of Elis' total sales after the transaction based on F2023 figures, but also in terms of customer concentration, and

(2) Market position, as the acquisition would add critical mass in another large market because of Vestis' leading position as a provider of workwear rentals and supplies across the U.S. and Canada.

These positive elements are moderated by the inevitable execution risk arising from the integration of two very large businesses, which can lead to unexpected and incremental integration costs, along with the additional leverage that the deal may entail. Indeed, Elis already envisions an increase in net leverage to 2.2 times (x) in the first year of the transaction, whereas the Company was previously aiming to reach financial net leverage of 1.8x by YE2024.

VESTIS IS A GOOD FIT FOR ELIS
Vestis, the spinoff from U.S. food service and facility service company Aramark, is one of the largest providers in the U.S. and Canada of workwear rental and supplies, which include linens and towels. Vestis' operations are therefore almost perfectly aligned with Elis' business, with the few exceptions of not serving the hospitality sector and being more focused on workwear than linen. In addition, similarly to Elis, Vestis is a national leader in its markets, benefitting from serving customers in different sectors, with industrial and manufacturing representing the largest portion at 38% of sales based on F2023 results. Vestis, therefore, represents an already consolidated and solid platform from which Elis can start expanding into North America, a move that the French-based company has considered for a long time now. The opportunity to buy Vestis has arisen from its recent weak operating performances and the loss of some important clients, leading to a lower market value and, ultimately, a lower potential transaction price.

EXECUTION RISK WITH ADDITIONAL LEVERAGE
Elis is accustomed to carrying out bolt-on acquisitions to expand its geographical footprint and consolidate its market position, having spent an average of more than EUR 100 million in acquisitions every year since 2019. We have always considered the execution risk of these transactions as minimal for the Company in light of its positive track record integrating new businesses in different geographies across the globe. Nevertheless, the acquisition of Vestis would be much bigger, as its market capitalisation is currently close to EUR 1.7 billion. We foresee an inevitable execution risk in integrating such a sizeable group, which could represent around one-third of Elis' group sales, in a market geographically remote from the Company's core business in Europe. In addition, Elis would need to improve Vestis' weaker profitability to a level consistent with the group standard (at or above 30% on an IFRS basis capitalising linen costs) thanks to synergies and more efficient operations. This will be key for the long-term success of the transaction. At the same time, Elis does not currently have operations of its own in North America and hence operational integration challenges will be minimal.

Elis has already proven it can venture into big deals; the Company acquired Berendsen plc in 2017, a transaction that at that time almost doubled Elis' scale, adding EUR 1.3 billion in revenue, and giving Elis an immediate and significant presence where it previously did not have any, in particular in northern Europe and the UK. Since the acquisition, Berendsen's EBITDA margin increased to 30% from 22%.

Finally, the Vestis acquisition will also increase Elis' net leverage, as anticipated by Company management, to 2.20x (compared with 2.06x in the last 12 months ended H1 2024 and an expected 1.80x in F2024), despite potential additional debt to finance the acquisition and Vestis' lower profitability. Nevertheless, this leverage level would continue to be consistent with the BBB credit rating, reflecting the Company's commitment to maintaining an investment-grade credit rating.

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500
Gerente de DBRS Ratings GmbH, Sucursal en España: Detlef Scholz
Representante legal y Responsable de la oficina de Madrid: Zulema María Aragonés Monjas