Flemingo BVI to buy out PE investors with IPO

Global duty-free retailer Flemingo BVI will buy out stakes held by five private equity (PE) investors post the listing of its Indian entity on the BSE and NSE in the coming months.

Flemingo BVI's India unit Flemingo Travel Retail (formerly known as DFS India Pvt Ltd) has filed for an initial public offer (IPO) to raise Rs 3,000 crore that will hit the market in mid-July this year. While a majority of the funds raised through the public offer will go to buy out the PE investors, incurring tax expenses and paying off debt on the parent company's books, approximately 10% of the total sum raised or Rs 300 crore will utilised by Flemingo Travel Retail for business operations and expansion.

Among PEs already invested and have funded a part of three acquisitions made by Flemingo BVI include Samara Capital from India, Samena Capital from Middle-East, China Development Investment Bank (CDIB) from Hong Kong, Albright Capital from Washington and Cartesian Capital Group from New York. The PE investors came in between 2008 and 2014 and have collectively invested about $110 million and own 33% stake.

Interestingly, while being a global duty-free retail specialist with operations across five continents, Flemingo Travel Retail chose to list in India. Atul Ahuja, group chief executive officer, Flemingo International Ltd, said, "By design, we had planned flexibility. However, when we were evaluating the listing in the European geography, we received feedback from our investors saying why don't we list in India. The European and American investors were pretty familiar with the aviation growth in India as Indigo was doing roadshows for its listing plans then. Taking that cue, we said lets revisit the plans and look at listing in India," said Ahuja.

Accordingly, the duty-free retailer has undergone (in February 2018) a business restructuring exercise for its holding company Flemingo BVI and three main operating entities viz Flemingo Travel Retail Ltd (FTRL), Flemingo Duty Free India (FDFI) and Flemingo UK. While FTRL is operating Mumbai an Delhi business, FDFI is operating the remaining Indian airports and the rest of the world, and Flemingo UK operates the cruiseline retailing business.

"Due to regulations, we had to have an Indian entity to list the company on the BSE and NSE. We decided to go with FTRL and decided to utilise part of the proceeds i.e, Rs 2,227 crore to buy out the other two entities (currently owned by Flemingo BVI) that have been valued independently by Duff & Phelps. This money will be utilised by the parent firm to payback mezzanine debt (net debt of $115 million) and buy back all the private equity investors," said Ahuja, adding that his present shareholding in Flemingo BVI is 58% and after the listing the stake will increase as all the existing PE investors will exit the company.

Ahuja started the duty-free business in India 2003 and Flemingo Travel Retail (formerly known as DFS India Pvt Ltd) was the first private player in this space in the country. Earlier, duty-free was managed by the central government through a subsidiary of the Ministry of Tourism called Indian Tourism Development Corporation (ITDC).

The next three years (2003-2006) were used to expand the business across airports and seaports in India before Ahuja moved overseas and expanded the business in Africa. "In 2010, we got an opportunity to acquire a stressed asset in Europe (Baltona Duty Free) and using that as a platform we started building on the business in the centre and eastern Europe region. We later acquired a few more companies in Europe basically to get the know-how in different segments/formats of duty-free. We bought an inflight duty-free operator in Turkey (Iris Ekspres) in 2011 and a cruiseline retailer (Harding Retail) in the UK in 2014.

"Using these platforms we started growing the business worldwide. Currently, we are operating across five continents from Sydney in the East to Miami in the West. At the time of filing the draft red herring prospectus (DRHP), we were in 26 countries. We have added a few more which will get updated in the red herring prospectus (RHP). Approximately 55% of our revenue is coming from the emerging market of which over half is from the Indian Subcontinent (India and Sri Lanka) and the US which fortunately are the fastest-growing markets in the world today," said Ahuja, adding that while Harding was the most expensive acquisition for Flemingo, Iris and Baltona were not a very capital intensive buys.

Business in the Asia-Pacific region is the largest piece at about 46% and the airport channel is the largest at about 56%. Asia Pacific is also the fastest growing part of the duty-free business at a CAGR of about 6%, airport channel is growing at 5% and the cruiseline business is growing at 7% annually.

According to a report by Avalon, the total value of the global duty-free sector was estimated to be $63.4 billion in 2016 and is forecasted to grow to $82.6 billion in 2021, registering a compounded annual growth rate (CAGR) of 5.4% during the period. The report added that the duty-free market presents an optimistic outlook based on strong growth in the international travel industry.

One of the key reasons being that duty-free shopping has moved beyond liquor and souvenirs to a wider retail offering with upscale luxury retail, clothing, fragrances and cosmetics. Growth in the number of international travellers especially to and from China, Southeast Asia and the Indian Subcontinent (India, Sri Lanka, Pakistan, Bangladesh, Nepal and Bhutan) is another key reason for growth in the future.

FLYING HIGH

• Approximately 10% of the total sum raised or Rs 300 crore will utilised by Flemingo Travel Retail for business operations and expansion
   
• The PE investors came in between 2008 and 2014 and have collectively invested about $110 million and own 33% stake