EURAZEO RECENT UPDATES
• 11/03/21: Eurazeo presented an all-time high NAV of €85.4 in FY20, a +21% increase since June 2020. The management board has proposed a dividend of €1.50 per share (+20% compared to last dividend payment). The company reported that it should also accelerate its divestment program.
• 7/03/21: Eurazeo announced a few months ago its willingness to sell its holding of Dessange, the hairdressing business. As of now there are 3 mains candidates for this financial operation: Pascal Costes and its 250 hairdressing salons, Provalliance (Franck Provost, Jean Louis David) and the private equity fund LFPI. The financial deal has a value around €150 millions euros. In 2010, when Eurazeo acquired its holding in Dessange the company was valued €80 million euros.
• 11/02/21: Eurazeo just closed its green fund Venture Smart City II at €80 million euros. It aims at investing in innovative digital ventures in buildings, mobility, energy and logistics sectors. With its former fund Smart City, Eurazeo raised €25 million euros.
BUSINESS MODEL & STRATEGY
• Eurazeo is a french leading global investment group with €18.8 billion of diversified assets under management, including €13.3 billion on behalf of third parties invested in a portfolio of more than 430 companies. It was created in April 2001 from the fusion of Azeo and Eurafrance. Interesting to note that initially Gaz et Eaux, renamed Azeo in 1999, was founded in 1881 and operating in water and gas distribution in the north and west of France. With the nationalization of gas distribution in 1945 it has progressively turned its activity towards asset management to become a pure asset management group in 1990
• As an asset management and PE firm, Eurazeo aims at identifying and accelerating the potential of firms in which they invest. It wants to support managers to make strategic decisions. Its investment strategy is to assists its holdings for 5 to 7 years before exiting.
• Eurazeo currently has offices in Paris, New York, Sao Paulo, Seoul, Shanghai, Singapore, London, Luxembourg, Frankfurt, Berlin and Madrid and 3 thousands people are committed to the development of the group.
• The investment group is structured around 5 distinct investment strategies and 3 other activities: Eurazeo Capital, Eurazeo PME since 2011, Eurazeo Growth since 2010, Eurazeo Patrimoine since 2013 and Eurazeo Brands since 2017.
- Eurazeo Capital is the group’s traditional activity, it invest in companies valued over €150/200 million euros. It focuses on supporting at key stepping stones for their development. We can mention CPK-Carambar & Co or Europcar Mobility Group as part of its investments.
- Eurazeo PME on its side is investing in small to mid-cap high performing companies with enterprise value lower than €150 million euros which have significant potential for future growth. From Dessange international to the chirurgical company Peters Surgical, Eurazeo PME invests in very diverse sectors.
- Eurazeo Growth was an early mover in 2010 in growth capital focusing on disruptive technology. It invests in companies from Series C onwards in companies which have a sustainable business model for few years and which aims at scaling-up their business. It has built a high quality portfolio including outstanding scales-up from Back Market to Doctolib, Meero of Farfetch.
- Eurazeo Patrimoine invests in real estate and infrastructure companies. Its portfolio includes Dazeo or Reden Solar. - Eurazeo Brands focuses in retail and consumer companies, from beauty and fashion industry, to leisure or food industry (Herschel Supply Co., Dewey’s Bakery and other famous brands constitute the fund’s portfolio).
- Idinvest Venture: investing in digital ventures. It financed the unicorn Criteo, but also Frichti and Leetchi, and has become a key player in the tech capital market.
- Idinvest Private Debt: it is focused on the midmarket segment and supports SME and MidCaps from diverse sectors (agri-food, healthcare..). In particular, its portfolio includes Grand Frais, Vulcain Ingénierie.
- Idinvest Private Funds: It selects the best european investment opportunities for a hundred of specific institutionals investors. It invests in PE funds and realizes co-investment to directly invest in companies alongside with the management.
• Eurazeo relies on two sources of fundings: 3rd parties Asset Under Management which amounts to €12.9 billion euros and its permanent capital of €5.6 billion euros (NAV).
On top of this, Eurazeo has €5.4 billion euros of Assets under Administration. These services offered to institutional clients generates fees and allows Eurazeo to receive constant revenues. This combination of PE activity and Asset Management is a key approach specific to Eurazeo’s strategy.
• Eurazeo’s P&L statements can be broken down into 3 components: Companies contribution (performance of portfolio companies), Investment Activity, Asset Under Management Activity . The investment activity brings revenues from capital loss/gain and dividends. While the AuM activity generates revenues from management fees and performance fees. Eurazeo’s Asset management activity manages Eurazeo’s Balance Sheet, and thus charges management fees and performance fees to Eurazeo’s investment activities
• In 2019, the investment activity net income was €107,0 millions.
• In 2019, the AuM net income was €124,1 millions.
OWNERSHIP
Eurazeo ownership structure is based on family and institutional investors. As of 30th June 2020, its ownership structure includes JCDecaux’s share of 18%, David-Weill Family (17%) and Tikehau Capital (6,6%). Free float amounts to half the total shares outstanding.
MANAGEMENT & ESG ANALYSIS
Governance: Eurazeo is administered by a Management Board and a Supervisory Board. The Supervisory Board elected by the shareholders.
The Management Board is composed by 4 members: Virginie Morgon – Chairman of the Board, Philippe AudouinCFO, Nicolas Huet – Secretary General, and Olivier Millet – President of the board of Eurazeo PME. The board had a 100% level of participation for the twenty comittees of the board in 2019.
Eurazeo’s supervisory board is an active, independent, assiduous committee composed of 15 members, including 2 members representing Eurazeo’s employees and 2 censors. Among the 13 members (excluding the 2 employees’ representants and the 2 censors), 46% are women and 54% are independent members. With 7 meetings in 2019, the Supervisory Board recorded a 93,3% participation level.
The Supervisory Board is directed by Michel David-WEILL, President of the Board, supported by the Vice-Presidents Jean-Charges DECAUX and Olivier MERVEILEUX DU VIGNAUX.
Eurazeo’s governance gives great importance to the diversity (gender parity, expertise) and the independence of its Supervisory Board’s. members.
Environment: Regarding its ESG commitment, Eurazeo’ launched in Sept. 2020 O+ incentive to achieve Zero Carbon emission by 2040 and to work towards reducing social gaps.
In June 2020, Eurazeo has been awarded Euronext Vigeo Indices “World 120” and “France 120” and kept is place in the “Europe 2020” index. It is a way to reward Eurazeo’s willingness to take into account all ESG issues in their strategic approach and investment activities.
MARKET OVERVIEW AND OUTLOOK
French PE market: significant factors and events
Considering the overall European PE market, there is an increasing trend in buy-and-build transactions in the French PE market. Nowadays, also due to Covid-19, PE funds tend to invest on tech, health and education-related companies which look more resilient and produce higher cashflow together with high margins. These sectors provide stable long-term perspectives which help to lower uncertainty and mitigate adverse risks. For these reasons, PE industry in France seems to be in a very good health. The past decades have been characterized by an exceptional growth for capital invested, both in terms of funds raised, amounts invested and the number of transactions. Also, the number of French PE funds increased as well as the number of investors. This growth is supported by the several factors, such as the increase in the availability of the funds and other structural and cyclical factors. As to the former, we say that many EU and French banks and corporations (e.g. European Investment Fund or Bpifrance) are investing in French PE funds. Besides, many venture capitals, business angels and family offices are also investing in French start-ups. It is important to say that France is characterized by an active French start-up’s microcosm and very strong research and development (R&D) departments. As to the latter, we report that, over the last years, France expanded its presence in the European PE market, thanks to a number of events. The first one is related to the election of Emmanuel Macron as President and his various reforms for the French business. Then, the regulatory framework gives nowadays several choices of suitable and rejuvenated investment vehicles: the FPCI, a French innovation-focused fund which provides tax advantages, the “société de libre partenariat” (SLP), a new category of alternative investment funds on the model of British partnerships, the “organisme de Financement Spécialisé” (OFS), a new type of specialized funding fund, the “jeune entreprise innovante” for young innovative companies. Besides, it is important to mention the reduction of corporate tax, from 33 percent to 25 percent in 2022, and the abolition of the ISF, a wealth tax on all assets. Another event is Brexit, that represents a great opportunity for France. With Germany, the French PE market is becoming the main market for buy-outs in Europe. In 2019, a total of 238 buy-out transactions were closed in France, while UK, which was usually ahead, only registered 223 equity sponsor backed deals.
Competition and Market share
France is currently home for more than 230 private equity firms and it represent the second largest amount in Europe, behind the UK. Most of these firms (around 80%) are headquartered in Paris, with Lyon as second, accounting for 3%. French PE managers accounted for almost 16% of funds raised across Europe. French PE market competition is very high. Based on the research made by Prequin and as shown at the right, the greatest France-based PE funds are: Ardian (29.0 bn euro of funds raids in the last 10 years), whose primary strategy is balanced, PAI Partners (8.7bn) and Bpifrance Investissement (2.8bn) with buyout strategies, Access Capital Partners (2.5bn) with balanced funds, LBO France (2.4bn) and Astorg Partners (2.2bn) with buyout strategies. Then, there are: Idinvest Partners, Euromezzanine, Apax France, ACG Capital.
Specifically, Ardian is a Paris-based fund of funds manager and it is the largest French PE firm, since it has nearly €30bn, excluding real estate and infrastructure vehicles, in capital commitments. Recently Ardian acquires 50% ownership stake in Angus Chemical Company, one of the greatest deals in October 2020. The second is PAI Partners, the Paris-based private equity firm primarily focuses on buyout investments across five core sectors: business services, food & consumer goods, industrials, retail & distribution and healthcare. Among the other prominent France-based players (e.g. Bpifrance Investissement, Access Capital Partners and LBO France) some have buyout as their main strategy. However, venture capital continues to be the most prevalent strategy among French PE firms, with 38% of fund managers employing it as their main strategy, compared to 27% employing buyout.
Competitive Landscape (as of Dec. 2020)
Investor AB
Net Revenue: 88,125 million EUR
EBITDA: 55,392 million EUR
Operating Income: 53,521 million EUR
Net Income: 52,790 million EUR
Growth Revenue: 38,7%
EBITDA Margin: 62.9%
Operating Margin: 60.7%
Market Capitalization: 496,505.1 million EUR
Wendel
Net Revenue: 8,060.97 million EUR
EBITDA: 1,007.43 million EUR
Operating Income: 659.57 million EUR
Net Income: 174.50 million EUR
Growth Revenue: 5.85%
EBITDA Margin: 12.50%
Operating Margin: 8.18%
Market Capitalization: 4,263.80 million EUR
Ratos AB
Net Revenue: 20,941 million EUR
EBITDA: 1,908 million EUR
Operating Income: 1,411 million EUR
Net Income: 693 million EUR
Growth Revenue: 1.6%
EBITDA Margin: 9.1%
Operating Margin: 6.7%
Market Capitalization: 14,670.1 million EUR
Covid-19 pandemic and its consequences
French PE market is assumed to slow down sharply in the coming months due to the rising uncertainty linked to Covid. Strategic sectors and others considered essential for the economy may be subject to future transactions, including health, technology and food industries. However, Eurazeo is based on a set of procedures to constantly control and mitigate the impacts that Covid could have on its portfolio firms, particularly those exposed to tourism and transport and those exposed in China primarily for their supplies. Besides, Eurazeo is well equipped to deal with the economic uncertainties, thanks to its solid financial position (more than 533 mn euro in cash with zero debt in 2019, undrawn secured credit line of 1.5 bn euro and dry powder of 3.8 bn euro).
FINANCIAL ANALYSIS
In 2020 Eurazeo’s revenue went down to 3,894.84 Million EUR, a 24.3% drop from the previous year. This can be mainly attributed to the current pandemic which has negatively affected the majority of industries. It is a detrimental event for a firm with a high differentiation like Eurazeo. The revenue is expected to increase by 17.3% in 2021. The profitability has been shrinking too in the past years. Between 2019 and 2020, the ROE has decreased by 13.3%, reaching a negative value of 11.2%. The return on invested capital has decreased exponentially. ROIC was 20.4% in 2015 while in 2019, it had reached a value of 1.3%. Net Margin went drastically down with 77.8% in 2015 and 2.6% in 2019.
The company has suffered a drastic decrease in operating cash flow in 2017, reaching a negative value of 625.9 Million EUR, this was due to the relatively higher number of investments made during the year. A big part of these investments were made in the infrastructure sector as the company is investing a lot in real estate. Cash flow has been increasing since then and it finally returned back to a positive figure with 275.6 Million EUR in 2020. The level of investments in building and machinery have increased too in the last 2 years. In 2019, the Group invested in new acquisitions such as Dorc, Elemica and Emerige for a total amount of 1,747 Million EUR. However, this upward trend in cash flow cannot be considered as a positive sign since Eurazeo increased its external financing by more than 100% last year. Moreover, its debt to equity ratio was 0.36 in 2015, while in 2019 it became 0.84, 30% higher than the 0.65 industry average. Furthermore the company has not paid any dividend in 2020.
Eurazeo might be accumulating cash in order to facilitate future investments. The cash on its balance sheet has increased by 14.5%. Its most liquid marketable securities have decreased from 17.313 million EUR to 7.233 million EUR and its holding in treasury shares went down by more than 80%.
NET ASSET VALUATION
Eurazeo, like many other investment companies, is traded at a discount to its NAV (23.2% currently). It means that the share price is inferior to the NAV per share.
Based on the latest updated NAV released by the company (March 2021), we estimated the 12 months target NAV by applying to current investments (per segment) a specific IRR, whose target values are given in the annual report. We decided to be conservative and take the lower value of the IRR ranges as they seemed too optimistic. We then targeted a 10% IRR for private assets, 15% for PME, 20% for Growth segment, 10% for Brands, 20% for Venture, 7% for Private Debt and 10% for Real Assets.
We estimated the target 12 months share price discount to NAV using the discount mean of the three last years. We found a discount of -14%. This gives us a target share price of €80.9 which represents a consequent premium of 23.3%.
INVESTMENT THESIS
• We set an overweight recommendation for Eurazeo, with a 12-month target price of €80.9 vs €65.60 currently, representing a premium of 23.3%.
• We are confident on the capacity of Eurazeo to capitalize from the economic recovery and the PE market upward trends, while remaining protected to potential downturns due to its own dual model, relying on both asset management stable revenues and private equity capital gains, and high diversification through its different funds.
• Its strong financial position, high fund-raising ability and huge level of dry powder will allow the group to seize investment opportunities in different businesses
• The intensity of competition in PE, with powerful funds especially in Europe, make valuations less attractive due to rising bids although we think Eurazeo’s experience in PE is still a competitive advantage in this market.
• Potential downside risks may come from a rise in interest rates, threatening the PE and AM activities while having a negative impact on net asset valuations in Eurazeo’s balance sheet.