EU CONSUMER CYCLICALS: Consumer & Transport: Week in Review

The action this week was in M&A: Mars choosing to issue its full $26b supply in dollars (perhaps to avoid a local roadshow) and Walgreen Boots being taken private potentially unlocking the first step to a CoC at 101. With Couche-Tard management flying back to Tokyo next week there is more on the horizon. There was plenty of vol in equities including VF down -18% this week and Burberry -8% - both potential turnaround stories that we started to see value in this year after earnings trended in the right direction. They are now moving high beta to macro updates; in VF’s case it may have been exacerbated by Macy’s 4Q sales that were down -1% (FY -3.5%) and guidance for continued fall of up to -2%. In Burberry’s case it was Italian luxury brand Ferragamo that reported -4% fall in the 4Q (FY -8%) and added “we remain cautious on short-term expectations”. Both are prone to blame macro given FY24 performance but the higher beta to those updates may represent the changing sentiment around consumer health. On a more positive note, we do see pockets of value opening again; firm value on Elis 28s and Kellanova (now Mars) 34s some on the Air-France 29s and interesting levels but with no view yet on IDSLN 30s in sterling. We get a breather from earnings next week.

• Edenred provides clarification to us on regulatory exposure but stays short of exposure at the EBITDA level. After the seemingly outsized Italy fare cap impacts, that will leave us continuing to price a regulatory discount. We see levels fair here.
• Air-France guidance is firm giving the curve the chance to compress into well bid-in IG peers. We revisit the hybrid stack, refi is guided to occur ahead of coupon steps.
• Campari reports in-line with what it said it would but a beat on analyst expectations that had drifted lower. Guidance is tad lacklustre but some of that is self-inflected. Net it may give the former value view 27s comfort around levels here after a strong -60bp rally in.  
• Elis continues to demonstrate cycle resiliency in its FY guidance, though at a moderated rate. The shift towards equity payouts is understandable after a run of deleveraging into IG. We see value on the 28s that weakened on the news.
• Adecco: equities are +24% in the last month coming out from lows mirroring peers. Investors are likely eyeing the cycle bottom, particularly in Europe where global staffers are heavily exposed. Adding to sentiment, a broker came out this week remarking Adecco had an 5% exposure to Aerospace and Defence. We do think structural concerns on the industry remain but equally see Adecco priced to -2 notches of downgrades and issuing better than peer guidance. We see curve as fair here with limited room to widen in the near-term.
• Lufthansa rides the industry supportive conditions in the 4Q, but guidance remains open-ended outside its ambitious €1.5b+ EBIT uplift target. Retail heavy curve already prices success. We do expect supply this year.
• Scandinavian Tobacco: 4Q is firm on margins but guidance remains wide in range as it cites uncertainty on how market trends will evolve. We see leverage close enough to IG thresholds (at Moody’s) preventing the 1.25% step-up.

Event driven news

• Phillip Morris may sell its cigar business for $1b as it continues working on increasing its market leading 40% non-combustibles exposure. We estimate it contributed ~1% to group revenues, potential acquirers include Altria and STG.
• Walgreen Boots makes history as it is bought out by PE player Sycamore. Financing details are not disclosed but we see the first step to CoC at 101 being unlocked here. $ long end which is facing the most upside (even more than equities) is up to +13pts richer this week.
• Alimentation Couche Tard is not backing down even as 7-11 owner announces restructuring measures including a $5.4b sale of its local supermarket business.  ATD is looking at stores it can divest to get past potential regulator concerns and will be flying over to Tokyo next week.
• IDS takeover by Daniel Kretinsky may be delayed due to his involvement in Romania. We revisit the protections steps will offer. Ex. value view €28s look fair here now while the £30s look value on RV. We caution investors to have a firm view before heading in. 

Primary (NIC in brackets)

• Ahold Delhaize 8y (-5bps), Air Portugal 29s Tap (+60bps)

Rating Action

• Auchan (Unsec: NR/BB- Stable): S&P downgrade to BB- and now off negative outlook. The real mover are the details it provides (ahead of the company) on the RE/Retail separation. It looks somewhat as expected – co will issue debt directly from the RE arm but with reported purpose of reducing inter-company (and hence Holdco) debt. That could impact bonds which make up most of Holdco debt. S&P sees no rating impact given it consolidates all debt independent of location when accessing Holdco/Elo ratings.