Scope Ratings affirms CECONOMY’s BBB- issuer rating and S-2 short-term rating following the company’s announcement on 26 July 2017 that it intends to acquire a minority share of 24% of Fnac Darty SA from French investment holding company Groupe Artémis. The transaction is expected to close in the next weeks.

Rating rationale

CECONOMY has agreed to acquire the minority share for a purchase price of about EUR 450m (6,451,845 ordinary shares at a price of EUR 70 per share). From Scope’s perspective, CECONOMY will likely finance the acquisition by issuing commercial paper from its EUR 500m CP programme and using its significant cash cushion.

In Scope’s view, the acquisition will strategically enhance CECONOMY’s business risk profile in the longer term, given Fnac Darty’s leading position in the French consumer electronics and editorial products retail market. Firstly, the deal will open access to the French market, in which CECONOMY is currently not active. Secondly, the deal proactively addresses the consolidation needed among European retailers to remain competitive. Thirdly, the exposure indirectly broadens CECONOMY’s product range to editorial products as well as widens its multi-channel sales approach thanks to Fnac Darty’s significantly stronger e-commerce outreach (16% online sales in BY 2016 at Fnac Darty versus 12% for CECONOMY in Q2 of BY 2016/17).

For the financial risk profile, Scope views the acquisition to be neutral. While Fnac Darty will not likely distribute dividends to CECONOMY in the short term, Scope highlights that CECONOMY has been allocated limited interest-bearing financial debt in the course of the Metro AG demerger. CECONOMY’s gross financial debt position only comprises a EUR 250m Schuldschein loan. The transaction will likely increase leverage – as measured by Scope-adjusted debt/EBITDA – to 2.4x in BY 2016/17E and 2.3x in 2017/18E (from 2.1x and 2.0x respectively), which Scope regards as remaining commensurate with a BBB financial risk profile. Nonetheless, Scope expects CECONOMY is likely to bring back its leverage towards 2.0x through adequate measures.

Outlook

The Stable Outlook reflects Scope’s expectations that CECONOMY’s financial risk profile will not significantly deteriorate in the coming years. Specifically, current credit metrics are reflective of a BBB category, as indicated by Scope-adjusted funds from operations/SaD of 35-40% and a Scope-adjusted debt/EBITDA ratio of below 2.5x.

A higher rating could be triggered by an improved business risk assessment, for example, through better operating margins and free cash flow, or financial metrics sustainably exceeding aforementioned levels.

A negative rating action could result from a more aggressive financial policy or a sustained, negative deviation from ratios commensurate with the present ratings.

Legal and regulatory disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr Stefan Bund.
The rating analysis has been prepared by Olaf Tölke, Lead Analyst
Responsible for approving the rating: Werner Stäblein, Committee Chair

Rating history
Date; Rating action; Rating
27 June 2017; Initial; BBB-/Stable
27 June 2017; Initial; S-2

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity. The issuer participated in the rating process.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating
Website of the rated entity; unaudited annual financial statements; detailed information provided on request; data provided by external data providers, external market reports; press reports/other public information.
Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently. 

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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Rating issued by
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