S&P Global Ratings assigned a ‘B’ long-term issuer credit rating to Sprint HoldCo B.V., the holding company of Accell Group.
The rating agency also assigned a recovery rating of ‘3’, which indicates its expectation of about 65 percent recovery in the event of a payment default, to the company’s €700 million senior secured TLB.
S&P’s stable outlook reflects its expectations that the company would pursue its EBITDA growth, due to strong tailwinds in the e-bike market, such that S&P Global Ratings adjusted leverage would remain stable at about 5x on a sustainable basis and free operating cash flow (FOCF) to debt would remain stable at about 2.5 percent to 3.0 percent in the next 12-to-18 months, despite supply chain challenges.
Financial sponsor KKR and investment firm Teslin Capital Management purchased e-bike manufacturer Accell Group N.V. for about €1.9 billion in a public-to-private LBO.
Sprint HoldCo B.V. issued €700 million senior secured Term Loan B (TLB) and a €180 million senior secured Revolving Credit Facility (RCF) to acquire the company and refinance the existing debt, while KKR contributed €1.3 billion of equity.
S&P said in its analysis, “Our issuer credit rating primarily reflects financial-sponsor ownership and a capital-intensive business model. In January 2022, financial sponsor KKR announced its plan to acquire Accell Group in a public-to-private LBO. To finance the transaction, the acquisition vehicle Sprint BidCo B.V. issued a €700 million TLB and a €180 million RCF, which remained undrawn at closing. KKR contributed an equity injection of €1.3 billion, representing about 65 percent of the financing needs. KKR now holds 88 percent of Accell Group, while Dutch investment firm Teslin retained a 12 percent ownership stake. The issuance led to an S&P Global Ratings-adjusted leverage ratio of about 5.3x at the close of the transaction. We also note that the offer memorandum reflects KKR’s commitment to a maximum net leverage ratio of 5x, based on structuring EBITDA and excluding any potential drawings under the existing facilities for working capital purposes from the debt definition. The committed threshold corresponds to an S&P Global Ratings-adjusted leverage ratio of about 5.5x-5.9x, depending on the RCF and working capital facility drawdowns, which reflects the future leverage trajectory for the company.
“Ongoing supply chain issues are exacerbating liquidity needs and hampering FOCF generation. Accell Group sources batteries from Eastern Europe, frames and other bike components from Thailand, Vietnam and China and assembles traditional and electric bikes in one of its four European manufacturing sites. Its business model is working capital-intensive and is characterized by elevated intrayear liquidity needs. Accell Group witnessed an exponential rise in demand over the past two years of the pandemic, which created bottlenecks at Accell Group’s key suppliers’ level, resulting in delayed production of finished goods and forcing Accell Group to increase the level of inventory to about 40 percent of total sales in 2021 compared with about 20 percent in 2020, in order to manage timely delivery to its customers. As a result, the company’s change in working capital consumed about €200 million of liquidity last year. Furthermore, ongoing lockdowns and low vaccination rates in Asia are slowing the delivery of components, pressuring the company to increase its already high level of inventory.
“On top of increasing inventory, Accell Group took numerous measures to alleviate the impact of the disruptions, such as reducing the complexity of bike components, enabling parts sharing across various models, multi-sourcing from suppliers located in Europe, and adopting a sales and operational planning (S&OP) approach to manufacturing, allowing for an efficient reorganization of operations. We also note that Accell Group manages its exposure to foreign-currency-denominated purchases via yearly cash flow hedging, following a monthly rolling approach to minimize the impact on margins of currency fluctuations. Hence, we believe that the current strengthen of the dollar against the euro will have a marginal impact on Accell’s cash flows. In our base case, we assume that supply chain issues will remain in place through 2022 and at least a major part of 2023, hampering cash flow generation at Accell Group. We project reported FOCF after lease payments of about €8 million-€10 million for 2022 and 2023, translating into an S&P Global Ratings-adjusted FOCF-to-debt ratio of about 2.5 percent-3.0 percent.
“Accell Group’s solid market position will further benefit from electric bike tailwinds, albeit in a fragmented sectorThe electric bike market has been growing at a steady pace over the past several years, with a compound annual growth rate (CAGR) of about 25 percent over 2015-2019. The COVID-19 pandemic significantly accelerated this growth, with a reported CAGR of about 42 percent in 2020 and 2021. Committed governments’ spending for cycling infrastructure in various European countries, as well as subsidies in place to support the shift of customers toward clean transportation, are fueling the growth of electric bikes (both conventional and cargo), which are considered a means of transportation, rather than sporting and recreational items. We believe Accell Group is well positioned to profit from these tailwinds, thanks to a strong portfolio of 12 proprietary brands, with a clear market segmentation that limits cannibalization. Nevertheless, the market is highly fragmented, with several established specialized manufacturers, such as Trek, Giant and Merida competing at a global level for market share. The positive market dynamics are also attracting an increasing number of new entrants, in particular automotive original equipment manufacturers. Prestigious companies, such as BMW, Porsche and Mercedes-Benz, have recently launched premium e-bikes. They can leverage brand equity and supply chain savvy and are positioned in the upscale segment; however, these rely on the expertise of existing bike manufacturers for design and distribution of their products.
“The parts and accessories (P&A) segment will doubly enhance Accell Group’s revenue growth and help diversify the distribution network. Electric bikes have an average lifespan of five years, shorter than the average 15 years for traditional bikes, and are dependent on key components which tend to wear out fast, in particular batteries. Due to its established dominant position in key geographies, the P&A segment will significantly contribute to Accell Group’s revenue growth. This segment represents about 30 percent of total revenue and experienced a significant growth of about 17 percent CAGR over the past five years.
“Through its proprietary and third-party brands, Accell Group’s P&A segment is well-positioned to capitalize on synergies with the electric bike manufacturing segment, and investments in components complexity reduction will allow Accell Group’s proprietary brands to benefit from a platform approach to services and repairs. We also believe these dynamics will support Accell Group’s plans to improve its presence in the direct-to-consumer distribution space, both online and through franchised stores. Given the average selling price of electric bikes and the complexity of the product, brand equity and the need for a close-to-home repair shop are increasingly more important for consumers in this market. We believe that the company’s plan to deploy about 130 stores by 2026, alongside its already strong dealer networks, will build on the company’s knowledge about consumer taste and behavior and differentiate Accell Group further from the competition.
“The ratings are in line with the preliminary ratings we assigned on July 20, 2022. See Dutch E-Bikes Manufacturer Sprint HoldCo B.V. (Accell Group) Assigned Preliminary ‘B’ Rating; Outlook Stable, published July 20, 2022, on RatingsDirect.
“The stable outlook reflects our expectations that Accell Group will continue its revenue and EBITDA growth trajectory, thanks to strong market tailwinds and the pursuit of production efficiency, such that S&P Global Ratings-adjusted leverage will remain stable at about 5x. Despite working capital volatility in the short to medium term, we expect FOCF to remain positive, such that adjusted FOCF to debt will remain stable at about 2.5 percent-3.0 percent in the next 12 to 18 months.”
