Good morning, everybody. I welcome you to this press conference today on our acquisition project of Premier Farnell. This is a very important milestone for our group, and it's a very important day for us. I have with me Neil Harrison, the CEO of Teco, Technical Components Division, Reto Welte, our CFO, and Dirk Lambrecht, currently CEO of Sealing Solutions, and he will be my successor as of 1st of January 2017. Before we will talk about this transaction, our Chairman, Ulrich Graf, will give you a review on our portfolio management in the past years and show the relevance of this transaction in our overall portfolio. Ulrich.
Thank you. Dear ladies and gentlemen, I will give you, as Paul already has said, a short overview on our strategy and portfolio management. We are continuing to focus on the structure of industrial holding with an impact on mission, strategy, medium-term and financial planning, as well as monitoring of the corporate divisions. With the divisions IT, HR, PMI, and communications, a clear guidance has been set. Management capabilities will be increased qualitatively and quantitatively according to requirements of group and divisional strategy. We consider ourselves as multi-niche player. The targeted niches should have a high potential for growth definable for markets and customers with a clear differentiation from the mass of competitors. Ideally, the niches are globally with high entry thresholds.
Concerning multi-niche player, we defined strategic guideline such as focus on markets where we can develop a leading position, focus on system critical application in sealing, or time-critical services in high service distribution. This principle did guide us in our portfolio management. In 2006, we have been a conglomerate with five divisions. There haven't been interdivisional synergies. Of course, there have been differences in performance and strategic positioning. After the first phase of improvement of efficiency in the existing segments, we focused afterwards on improving the portfolio of the group. The aim was to achieve high portfolio price earning values, enabling us to profitable increase capital for acquisition without losing the majority in votes and capital. Cabling Solutions has been privatized and is not anymore part of the Dätwyler Group. In the past 10 years, we have completely restructured our portfolio.
We have divested an accumulated turnover of about CHF 700 million. These are the red columns, and acquired about CHF 700 million in the same time. These are the green columns. The portfolio changes combined with operational improvements did lead to more than 100% higher EBIT margin. As a group, we have not grown because of the divestments on the one hand, and the other hand, of the strengthening of the Swiss francs. The quality of the portfolio has, however, improved considerably. Today, we have two focused divisions. Sealing Solutions is a result of the merger of the rubber and pharmaceutical sectors, is a global operating division. In Sealing Solutions, we have already reached the target of being the leader in our market segment, such as automotive, pharma, civil engineering, and Nespresso. In Technical Components, we are leader in some geographies only.
This acquisition now makes us also in Technical Components a global leader, a target we had in mind since 2006. The current uncertainty on Brexit and the management changes in Premier Farnell opened a window for us to do this important transformational move for Dätwyler. Okay, that was my short overview. I will hand over to Paul now, who will explain the transaction.
Thank you very much. We now go in the details of the transaction as it was announced this morning and give you some more information about the different aspects. You will also hear more details about the strategic rationale directly from Neil Harrison. Let me do first a summary. We offer, as you could see from the press release, GBP 1.65 per share of Farnell. This compared to yesterday closing means a premium of 51%. Here, I want to make the remark that the shares of Premier Farnell are trading at around 7 times EBITDA multiple and whereas most businesses in distribution trade around the 10 times or higher, 10-11 times EBITDA multiple. The total value of the offer for the equity part is GBP 615 million. This corresponds to CHF 848 million if we calculate with exchange rate of CHF 138 per GBP.
If we go to the enterprise value, we're talking GBP 792 million or close to CHF 1.1 billion. There are already estimates out in the market on the EBITDA multiple of this enterprise value, which are clearly considerably below the 10x multiple. Compared to what the valuation is of distribution businesses, we think this is quite an attractive price. The offer is recommended by the board of directors, and I can also say here that 18.5% of the shareholders are in support of this transaction. We expect that closing can happen in Q4 2016, and we follow a scheme of arrangement where there will be a general assembly in Premier Farnell and then a court meeting, and obviously we also have to wait for approvals, antitrust approvals, mainly Austria, Germany, Poland, and the U.S. We do not see any concerns with this regard.
Short summary on the strategic rationale. We clearly can create in one go a leader in the high service electronic components distribution. You will hear a lot more about that from Neil. The product range and the geography are very complementary, and we will be able to offer our customers one-stop shopping, which obviously will increase the attractiveness of our webshop a lot. We expect considerable synergies in the area of CHF 50 million-CHF 70 million annually as of end of 2019. The CapEx we expect are in the area of CHF 80 million and about CHF 40 million of one-time cost. The financing is committed and fully in place and we envisage also equity increase of about CHF 200 million, to which I will come later. The acquisition will be accretive, increase earnings per share immediately even before any synergies have been achieved and implemented.
All in all, a quite attractive move, obviously the most important is the strategic rationale, for this I hand over to the expert, Neil. Thank you, Neil.
Thank you very much, Paul. I hope your morning has been as interesting as mine and will continue to be so. It's probably true to say that when I joined Dätwyler 18 months ago, it was very clear that we had some operational challenges that could be very quickly addressed through, in essence, a revamped team and a revamped focus on some of the basics of a distribution business, we are making some good progress there. New products introductions that we talked about in our last investor conference in October are on track. We've launched our own brand with great take-up from customers. Our active customer base is growing and has been doing so for a number of months. Perhaps most importantly in relation to this particular transaction, our systems deployments are now being deployed on time, on budget with very smooth integrations.
Of course, none of these things are ever perfect, compared to probably where we were a few years ago, we really now know how to deploy the right kind of systems at the right time to cost in these businesses. Indeed, a number of our brands are also growing internationally as well. In particular, the Reichelt brand, which is very exciting for the Teco division. With all of that said, it was very evident 18 months ago and very evident before then that the Teco business would face a strategic challenge. I can probably articulate that for you in three very simple terms. If you take a look back into the marketplace, you've either been a new entrant into the e-commerce, high technical, high service distributor space, and you've done so with common warehousing, very performant one web shop with very limited local presence.
You can now trade globally from anywhere in the world and ship generally on a one or two-day basis. You are what you might call a traditional high service, previously catalog distributor, and you're then trying to transition your business model to be competitive in this new online digital world. That's clearly the place that we find ourselves in. Yeah. That's one. That transition, generating the right economies of scale, to be able then to invest in the other one, which is increasingly our customers want a one-stop shopping experience. They value convenience. They would like all of their purchases, their non-production, increasingly critical, time critical, service critical, for maintenance, for design. They would like to have all of that through ideally one or two suppliers.
Therefore, you have to have critical mass both in distribution, you have to have both critical mass in product range, you have to have, to some degree, an international presence, as many of our customers themselves are indeed international. That's absolutely critical. That mass, the customer, who obviously generates the revenue and the ultimate profitability in the business. Perhaps most importantly, in addition to those two things, is our suppliers. We are a trading company. We buy and we sell. We add value in between. Our suppliers are increasingly looking for and will support and indeed will favor those distributors that can feed the market with their new technology. That's critical in high service technical distribution. I know there are many questions, which I am sure we will be happy to answer later around the business model and is it sustainable.
I would just highlight that those who have entered this market without the traditional, if you like, burden of some of the infrastructure investments. If you take Mouser, for example, who have recently said that they are making double-digit returns. The number was 16%. If we look at our own businesses in Reichelt, it makes double-digit returns. If you look at Farnell's European business, it makes double-digit returns. If you look at the CPC business, it makes double-digit returns and sustainable market share gaining returns. I passionately believe this is a marketplace that can make very good returns for the business. That's kind of the summary. If I just take you through some of the actual numbers. Pretty much overnight, we become either the or one of the largest distributors of high technology, high service components in the world. With total sales of 1.8 billion CHF.
That gives us the scale that we need to operate and drive efficiency in the marketplace, both in operations, in logistics, in marketing expenditure, in investments in web shops, and the like. It really gives us a completely different dynamic. Look to the right-hand side, we have, with this particular acquisition of Premier Farnell, amazing synergies on the geographic footprints. We are, of course, extremely strong in Sweden. We are extremely strong in Switzerland. We have a growing presence in Eastern Europe, but Premier Farnell has strongholds in the U.K., the U.S., an ever-growing presence in Asia-Pacific, which is where the growth in this industry is mainly being driven from. It's not just a production environment in Asia, it's also a design environment, it's a maintenance environment. Increasingly, it's an increasing design environment as well, as education really has taken that population to a completely different level.
We have great geographic synergies. We also see through the amounts of Google search in a number of these markets that actually combined, we are often the number one search for business in these marketplaces based on our relative brands. There's a real demand for the two business propositions, and that's really very exciting. If you look at the scale, over a million products stocked in warehouses around the world, goes to this idea of completing the shopping basket of customers. Just a little snippet on that, our product range will be substantially different to any of our competitors.
If you take the Nedis product range, all of the cabling, the battery packs, even though that's more of a retail business, the product range and the own brand capabilities of that range with higher margins normally is also cross-sellable through all of the other brands. In Reichelt, very popular in 3D printing, very popular in some of the more hobbyist maker technologies, Arduino, Raspberry Pi, and that also cross-sells through to the business-to-business distribution predominantly in Distrelec, Farnell, Newark, the element14 trading brands of Premier Farnell. That product distinction and the ability to cross-sell will come onto later, but also I think stands out in this particular acquisition. I think almost from an immediate point of view, we will have one of the lowest costs now we've completed a number of our integration project structure in our business model, and we'll continue to drive that efficiency.
Customers are, in this marketplace, willing to pay a premium for efficient same-day or next-day delivery. We have to continue to drive that efficiency using the economies of scale, deliver the promise. Most of all, they value convenience. They want a quick search, they want a full product range, they want it in stock, and they want to know they're going to get it before 12 o'clock tomorrow. You have to have excellent operating infrastructure to be able to achieve that, which we have both developed and which we will acquire. I think basically the marriage, if you like, of Premier Farnell and Dätwyler, and in particular, the Teco division, has so many perfect matches, both in geography, in product range, in shared learnings on infrastructure, that it really is very compelling.
That said, we will become one of the largest in the world and certainly, I suspect, in Europe. However, even when we count the top five turnover of ourselves and our major competitors, we will still be in a market where we can address 80%-85% of a highly fragmented, distributed market. It's not like we're becoming the big fish in a small pond. We're becoming one of the biggest fish in a very big pond. We're therefore able, I believe, through all of that propositional enhancement, to begin to increase share of mind in customers, through to share of wallet, through to increased shareholder value, because that's really how this business will work.
I think you know these slides already, but on the top right, just to be very clear, we operate in either side of the product lifecycle, in areas where it is quite critical. A design engineer looking to develop a new technology quickly, bring it to market, has both a technical requirement, a technical support requirement, which keeps many competitors out of that marketplace. Even if they could get the franchise, which often you can't, you still need to have the technical support capabilities, the data sheets, the ability to talk about design-ins. Premier Farnell, with that brings a very advanced set of businesses in Avnet, Mbed and their Raspberry Pi experience to help us improve our technical support capabilities. That's very exciting for us in an area where traditionally Teco has not been particularly strong. We are growing in our electromechanical, in our test and measurement areas.
In our active and passive, so microprocessors, resistors, condensers, these kind of things, is really where Premier Farnell is particularly strong. As we move through more into manufacturer supplying directly and volume distribution, there is clearly a need both to maintain products in MRO. There's also an increasingly exciting market in both robotics, where actually electronics and automation and sensing really come together. Also in the Internet of Things, which will be a massive market for high service technical distributors, both in the designing stage as people build modules to connect every single device we own, our clothing, our kitchens, our cars are already there, to the World Wide Web. Also, if you think of large capital equipment in the likes of GE and various other factories, they will also have to retrofit.
They will have to put these products into those machines so they can start doing diagnostics on whether that machine needs maintenance, when it needs maintenance, what's wrong with it, therefore there's a massive market available to us in that new technology. Even though we're seeing some areas of the business commoditize on the product side, a whole new exciting area of product development and technology is also helping us to think about further growth in that marketplace. Just to reposition or to summarize on this particular slide, we are in the system time-critical area of the business, where price is not the main driver. It's search, it's product selection, it's availability, it's delivery. Then if you can do that at a fair price, then that is, in essence, what the market accepts.
Normally, price in our surveys comes around about five or sixth behind the things I've just mentioned. We need the size, both from an economies of scale in the logistics infrastructure. We need the size in terms of brand positioning. We need the size in terms of market awareness. We need the size in terms of investments in some critical areas, particularly in product and new product and in digital, because these are the areas online technical distributors really need to invest. You can't make the level of investments we're talking about whilst you're the number 10, 12. You're in that 85% of the market, which is due for increased consolidation, I believe. Actually, again, when you look at the own brand development we have in the Nedis business, increasingly introducing own brands within the Distrelec business.
Premier Farnell brings a number of well-established own brands, which traditionally have a lower price point, but margins typically in the 60-plus arena, which is also a very attractive part of our future business model. We are seeing, as I say, certainly in Distrelec, a great take-up on those own brand introductions. Within two months, to give you a number, we already have 1,000 unique customers, and we've only introduced 800 products so far. I think, again, looking at margin and margin generation flowing through to ensure we generate a double-digit return business, it's all there to play for. If we take a quick look at the Premier Farnell business, really just summarizes a little bit what I've said. It's a global player, 38 countries. Very representative against a broad range of industries, 150 industries in total, with a clear focus on the electronic design engineering segment.
A massive customer base of contacts, 2 million individual contacts in many hundreds of thousands of customers. We will come on to why we think that will drive some critical parts of the synergies. Lots of products. Revenue CHF 1.3 billion. Has been largely stable, have to say, while a number of competitors have been able to grow in the marketplace, which we would look to address. An EBIT margin, which again I think is being suppressed because they are having to go through this restructuring of the organization to prepare the business ready for the future market dynamic I articulated earlier. Obviously, cash positive. It has a number of strong brands. In particular, around the EDE side of things, with the community websites, with some of the supporting non-component elements.
In particular, their ability, like with the Raspberry Pi, to actually manufacture the Raspberry Pi and have dual exclusivity on the distribution, both the manufacturing and the distribution of some of the latest technologies, including the latest BBC micro:bit, which is also getting huge attention, not just in the U.K., but globally, and is beginning to generate very significant growth in essence educating the design engineers of the future and capturing them, with our brand at the start of that process, which is also critical. Very quickly, we really tend to look at this business through the lens of the customer. Are you an MRO customer? Are you an electronic design engineer customer? Are you a hobbyist?
You may be a design engineer in Siemens in the day, and you go back to your garden shed and you do something in your garden shed, or you may just be an interested electrician. Through to consumer electronics and retail. What we quickly see here is that the tie-up between, in essence, on the left are more business-to-business brands, if you like. In the middle are business-to-consumer brands, and there will be increasing product availability as well both ways from Nedis and the MCM, CPC, and Reichelt brands. We have great coverage. The business-to-business area, of course, will be really helped by the element14 part of the acquisition. Just be clear, if you are not familiar, element14 is really the three Asian brand element14, Farnell element14 in Europe, and Newark element14 in the U.S.
That explains why we just call it element14 for the time being. That will represent about 75% of the revenue in the future, and 25% will come via the more business to consumer, business to retail operations. If we then move to synergies, we are incredibly excited about the synergies. We have identified pretty much 2 relatively even aspects in the synergies. I imagine the first you could already work out, which is, we each have, in each of our businesses, product advantages that the others can benefit from. element14, Premier Farnell brings a very strong EDE proposition that Distrelec has, in essence, been lacking for some time. Distrelec brings a great MRO addition, also some computing to that picture.
With Nedis, we also bring a whole variety of consumable electronic, whether it's cables and the like, that we can also cross-sell pretty much through each other's brands. Ryco, in particular with CPC and MCM, will also benefit from our close association through this acquisition with Raspberry Pi, one of the fastest-growing products in the world in high-tech distribution, and extremely demanded for by pretty much every distributor out there in the world. Obviously, with an exclusive agreement, we can support Ryco in a very favorable fashion, through that agreement. Perhaps one thing you're not familiar with, but I'll just try and explain. If you look on paper that the two margins of the various businesses look quite similar, but freight is adjusted in the Teco businesses on the OpEx level, whereas in the Premier Farnell businesses, it's adjusted in the margin level.
In essence, there's a 6% to 7% delta in the margins on the buy price. That's predominantly because Distrelec is too small often to buy, especially electronic components directly from the supplier. We have to buy through third-party distributors. Those third-party distributors make a margin. With our new scale and more direct supplier relationships, we would look to drive those margins more aggressively through direct sourcing, obviously, when our existing inventory begins to turn. Here we are very confident and probably even more confident, especially after some of our due diligence in the cost synergies. We see cost synergies very much obviously in the corporate space, very much in the fact that we all have, in essence, two sets of group functions in pretty much every area of the business.
Ultimately, we'll need to move that to one holistic team in the core businesses. Sometimes that will mean a two for one, sometimes it'll mean a three for two. But we're very confident that we can achieve those synergies. We will look for savings from logistics synergies in driving more efficiency, and putting volume, in essence, through the most efficient parts of our logistics operations. Altogether, with that, we see 50 million CHF to 70 million CHF improvement on EBITDA by the end of 2019. Of course, we will need to invest in the integrated businesses to get them there. The major part of that really will come in the replacement of the ICT infrastructure and ERP system. Premier Farnell does have a very old legacy AS/400 base system, very similar to actually what Teco had many years ago.
We now have lots of experience, all the lessons learned, if you like, from that integration. Now that we're progressing very, very smoothly, we believe we can make that a very successful integration. We will take investment. We do need to optimize warehouse capacity in certain locations. We will certainly need to, in certain locations, expand our warehouse capacity to make that happen. We will obviously need to invest in certain areas to achieve cost savings as well. We estimate circa CHF 80 million in terms of capital expenditure in this deal. Finally, to achieve, in essence, some of those operational efficiencies, organizational efficiencies, and the like, we estimate a one-off cost of CHF 40 million to achieve those. I for one, incredibly excited about this opportunity. I think this market is absolutely ready for consolidation.
I think we have lots of good peer examples who have made this transition or indeed who haven't made this transition, had to, and who, in essence, are generating the kind of returns that we would expect to make in the future of the business. With that, I'll hand over to Mr. Hälg. Thank you very much.
Thank you. A perfect strategic fit and no wonder that this company has been on our wish list since quite a while. The uncertainty around the British pound and management changes in Farnell, then our progress with our platform have now opened this window of opportunity to do this offer and go for this acquisition at this point in time. I'd like now to give you a view on how our group will look like after this acquisition. On the left side, you see Technical Components combined with Premier Farnell. Whereas before we had leading positions in some areas, but not globally, and we were mainly focused on Europe, we can now say we have a leading position globally in this business, as we already have in all our businesses in Sealing Solutions.
As a result of these acquisitions, all our businesses will be either number one or number two globally. We've clearly achieved what we had as a strategic target. You might now ask, why do we invest in Technical Components who did show a lower margin than in Sealing Solutions? We've done constantly every year in our strategy review a number of portfolio scenarios where we really simulated acquisitions towards several directions in all our businesses. We developed scenarios, how would Dätwyler look at as a pharmaceutical supplier, as an automotive supplier, as a packaging company? Because we have all these bridgeheads to be able to develop such scenarios or to become mainly a distribution business.
Very clearly, it has shown that doing this kind of an acquisition in the distribution business will lead to the highest returns because there are immediate synergies, where in none of the other scenarios there would be such immediate synergies. We basically in many cases would buy future EBITDA with the cash of today. We think in the overall portfolio, this is the right move to do and as I said in the beginning, puts all our businesses now in a leading position. I'd like to go a little bit more into the numbers now. They are based on the 2015 published numbers and converted to CHF. You see Technical Components on the left, standalone, CHF 459 million in sales at 2.5% EBIT margin last year because of this building of the new platform and the restructuring. By far not in the optimum.
We now combine the numbers with Premier Farnell, the business is CHF 1.8 billion in turnover at an EBIT margin of 5.4%, which still is below what we think these businesses can do. We look at the group standalone, CHF 1.2 billion in sales at 11.9% EBIT margin, combined with Premier Farnell, CHF 2.5 billion in sales at the 9% EBIT margin, but with an increase of absolute EBIT from CHF 139 million to CHF 222 million. Let me now do a outlook to 2020, where we've always set our targets. We have set as a target to clearly improve the Technical Components business, where I believe we can grow it above the CHF 2 billion turnover line, and we clearly want to achieve double-digit margin in this business by 2020.
This acquisition will not stop us from growing the Sealing Solutions business, also not from doing acquisitions, which means that the total business now, including the growth we can expect from Sealing Solutions, would bring to the group to annual turnover of more than CHF 3 billion, and the EBIT margin we already had forecasted of higher than 12% as a group. We clearly are committed to deliver much higher results on the Technical Components business and are committed to the margins we've already set out earlier for 2020. I now want to come to the financing. As I said earlier, the equity part has a cost in Swiss francs of CHF 848 million. We have existing cash of CHF 162 million. This is the excess cash which we do not need for our operations, cash at hand.
There is a term loan of close to CHF 300 million, which is quite flexible in terms of repayment. We plan to place a bond of about CHF 140 million to CHF 150 million. We have shares worth CHF 60 million, which we plan to place, and we plan equity increase of CHF 200 million. Obviously, we expect PEMA to participate in this increase. PEMA will keep the same financial participation and portion of voting rights. The financing is completely secured, and we reduce the leverage by doing the capital increase. If I do the summary on the financial impact, we'll have an immediate increase in earnings per share. You can model it on the 2015 numbers, and you will see that the increase is between 30% and 40%.
The expected leverage after acquisition is below 2.5x net debt over EBITDA, with a very strong deleveraging, because all our businesses are very cash flow intense. We also have quite attractive financing terms in this current environment. Also the Dätwyler share is trading at higher valuation compared to Premier Farnell, which also will have an impact. Let me now have an outlook on the timing and the next steps. We have the announcement, called in U.K., the Rule 2.7 announcement of the offer today. Farnell will prepare the scheme documents, where they have 28 days time after today. Somewhere in July, there will be the scheme document out together with an invitation for a general assembly. We expect a court meeting in August, where the offer or the scheme would be approved. In parallel, we are working on the antitrust approvals.
We expect them to be ready also sometime in the third quarter. Court approval of the scheme, probably late third quarter, early fourth quarter, which would mean closing, we expect by Q4 2016. This brings me to the conclusion and the summary. With one acquisition, we can become a leading high service electronic components distributor, increase our scale, at the same time, global presence and the purchasing power. Very complementary product range between the two companies, very complementary geographic footprint, and its earnings per share accretive from day one, even if we would do nothing. Pre-impact of synergies and one-time costs and investments. The synergies are quite considerable, CHF 50 million to CHF 70 million per annum on an EBITDA level. The target for 2020 is CHF 3 billion revenues for the total group at an EBIT margin of higher than 12%. A very exciting project.
We are all committed to deliver those targets and those numbers, and are looking forward taking up this challenge. With this, I conclude the presentation. Obviously now we are open for Q&A, and I'm sure there will be a lot of questions. Thank you very much. Any questions? Yep.
Is 30%-40% the increase of earnings per share? Ferber, AWP. Sorry, 30%-40% increase compared to 2015. I assume this is for 2017 after the integration or the consolidation of Or is this for 2016, when you expect the closing of Q4?
You can take the two P&Ls. You add up the profits, you do the CHF 200 million capital increase, then you get to these numbers.
Consolidation is 2016 already?
No. This is a pro forma simulation based on the 2015 numbers, including a capital increase of CHF 200 million.
Okay. Thank you.
Pascal Sein, Zürcher Kantonalbank. Looking at the share price of Premier Farnell last year, coming down from GBP 2.00 to GBP 1.00. Given two profit warnings, then new CEOs and so on, are you engaging now in a new restructuring case, which takes obviously maybe a bit of a time? Given your not so successful integration experiences from the last time, what's now different and what does it make so comfortable that now this time will lead in the end to a success story?
You want to answer?
Yeah, sure. It's a great question. First we'll address the second one first. I believe that during certainly the last 18 months, we can clearly demonstrate a much more efficient, accelerated, as I said before, on time, to plan, to scope, to budget deployment of all of the new systems. The phases, even just recently, of putting the merged warehouse management systems of Nedis and Distrelec together just went live two weeks with pretty much no issues. We will complete Switzerland's transition in July. The last phase of a business transition was in June, what we call phase 4, which was Austria and Italy, and pretty much went without any interruptions whatsoever. A new web shop, and basically the full SAP rollout.
Clearly, we now have the full centralized distribution center in place, and getting to a good, not perfect I have to say, but getting to a good operational standard. Clearly, we need to drive continuous improvement in that as well. I think the legacy of the last four years has generated a great list of learnings. I think we can confidently say those learnings have been applied because we have a much more stable set of rollouts over recent times. My particular view of Premier Farnell is that they've taken quite a long time to reach a target operating model. There's been, I think, a couple of years of quite a lot of degree of uncertainty in the organization about what model they were going to move towards.
I think if I look at the differentiation then for, and I'm not a share analyst, I'm sure you're much more familiar with this than I am. If I look through the share deviation that's occurred between, let's say, Electrocomponents and Premier Farnell over the course of that couple of years, I don't see that reflected in the trading differences. I think it's much more about the confidence in the management's ability to drive the business forward. I think we can demonstrate with Dätwyler's values, with the experiences in Teco, and indeed with some of the progress we've made in Teco already, that we are up for the challenge, as our 100-year slogan would say. Yep.
Felkess, Neue Zürcher Zeitung. You have mentioned the Brexit opening up a window for you. Can you elaborate a bit on that, why that is? First question. In terms of staff, do you plan any layoffs now as a result of that? How big will they be? Yeah, that's my two questions for them.
I'll take that. Why is Brexit a window of opportunity? Obviously, there is an impact on the valuation of the pound. We've played with all scenarios. We can live with both outcomes because Premier Farnell has over proportional cost base in the pound. Should the market suffer from a Brexit in U.K., we would have the advantage of a lower cost base. If there's no Brexit, then there is no impact on the market. From this standpoint, for us, it's neutral, but it helps in terms of valuation of the pound. With regard to measures on personnel, it's honestly too early to say anything in more detail.
Michaelina, MainFirst. I have a couple of questions on the product on the page eight, probably on the overlaps. It looks like you have a lot of products or at least end markets really in the same direction. Are there some products that are completely the same that you have? For example, Premier Farnell will not sell any longer and Teco will sell them. Do we have to expect further acquisitions? You showed the slides that 85% of the market still, there are many players there. I assume if you see other targets going forward that you will not hold back probably. A bit on the timing, the cap increase, do we have to expect it, I assume, after the closing? Also, on the Sealing Solutions, I think there are probably investors that are a bit worried about the Sealing Solutions part.
Now it's the smaller part in the division, and it used to be the larger or at least better performing part. What can we expect there in the future? It looks like a perfect setup to split it in four years. Sorry to be frank here, but I know you cannot probably give details here, but is that a thinking that you also had when you were thinking about Premier Farnell? Thank you.
You take it, Paul?
On the product side, as I try to articulate, there is some commonality, certainly around standard electronic components. Just to be clear, that's the active and passive world of microprocessors and these kind of things. What Premier Farnell brings is a much deeper range of both the product and the services associated with that, because a lot of that requires design and support. That's something that, in essence, the Distrelec brand in particular in Teco has not been very strong at, and that's one of the areas of our proposition that's actually been declining and not growing. As we've been growing in more of a heartland area where we have, in essence, more MRO customers and more MRO products to sell. There will be some shared products. That's where we believe we will gain both efficiencies and availability.
We believe we will also have the ability to negotiate better terms from direct supply, as well as higher quantities. That's also a benefit. We're also ultimately, I think we will see benefits in things like inventory provisioning, as we'll then have a much more sellable modernized range in that area. Then on the other side, this will really transact across all of the brands where the product suits the brand proposition. We will have new products to bring to the Premier Farnell businesses in the MRO, particularly in the automation space, the maintenance space. Some of the Scandinavian brands we have, like Nordic Power, and all of these kind of products. Of course, both Reichelt, Nedis, CPC, and MCM, as 25% of the turnover, will also have the benefit of having that crossover of products.
It is probably the most compelling addition from a product range perspective that you can make of an acquisition of those that are out there that gives you both that geography and product synergies.
On the capital increase, yes, you're right, that obviously will be after closing. On split, there is no discussion around that currently.
Yeah. Johannes Bonner from Centurion West. I have a question regarding the Premier Farnell business outside of Europe, which doesn't look to perform overly good, if I may say, in terms of margins. Can you elaborate what's missing there and how you can fix this problem? Should we be prepared that all what you're showing us in terms of synergies, that's really focused just on Europe and the rest is just diluting then the overall portfolio. What are the measures you're going to take there?
Certainly, I believe the strategic issue in the U.S. business is that, I think Premier Farnell has had a very EDE global strategy, which in essence is really focused on the electronic design engineer and contract manufacturers in that space. The Newark business was, you probably know the history better than I do, is part of a fairly expensive acquisition many years ago. That Newark business had a very strong legacy and customer base in MRO. I think the push from a global organization to switch that business more into an EDE business as opposed to its heritage of an MRO business, has seen that business underperform. It doesn't necessarily, a bit like we're articulating in Teco, it doesn't have the economies of scale, it doesn't have the depth of product proposition, to win against the EDE competitors in that marketplace.
Strategically, I think it finds itself in a position where we have to really look to carve out the right kind of niches for that business, and at the same time, drive operational efficiencies into the business as well. Yeah. That's from a strategic assessment point of view.
Asia?
Actually, Asia is rapidly growing. Very rapidly growing part of the business. I think Premier Farnell released a trading statement today. Was that right? Is it today? Yeah, today, which talks to, I think, very strong growth in their Asian business. I think, again, there is the possibility of what's happened in the past is this global Premier Farnell organization, I personally believe has maybe been overdone. That driving markets through a more centralized common infrastructure will also reveal increased profitability in the Asian business. It is growing very strongly, particularly in China. Very strong business in the ANZ region. Good solid market positions in Singapore and Malaysia. I think we can expect very strong growth, and increasingly drive increased profit out of that growth.
Questions?
Peter Romanzina from Vontobel. Two or three questions. First of all, you're changing your balance sheet completely. You're going from a company with a net cash into a company that is reasonably highly leveraged. Is that something that you have discussed with your larger shareholder? Are they happy about this? Obviously, your structure from a balance sheet perspective really changes a great deal and is completely different to what it has been historically.
Our main shareholders are the members of the board, they've been completely involved, obviously, in what we are doing and feel very comfortable with this situation. Again, if you go a bit back in history, our businesses are both Sealing Solutions and Technical Components, very strong in cash flows. This did lead us to the very strong balance sheet. Again, going forward, please remember that half of the dividends we pay out remain under the control of the board and can be reinvested into the business. This is exactly what we are now currently using and what helps us to do this transaction and to finance the transaction. There is a very high comfort level with that balance sheet.
Maybe you can help me. It's very difficult for me to build the bridge from your old targets, from Premier Farnell's old targets, into the new targets that you have. Because obviously, your new target states above 10%, which could mean anything above 10%. If we take it as a starting point to 10%, you're basically from your own targets with now synergies of between CHF 50 million-CHF 70 million after write-offs of CHF 40 million-CHF 60 million. You still have the same margin that you already targeted for Technical Components at Dätwyler only about three, I would say, two years later, including a lot of synergies, which are roughly about three, four percentage points at an EBIT level of the combined company.
How should I think of where you intended to go on a standalone and where you're going now, including synergies?
We had set out a target for 10% 2017 for our business. We still stand behind this target. However, there is a much bigger portion coming in addition. A business that is not yet at the 10%, which we also have to calculate in, plus the synergies. If you do the mathematics, it's relatively easy then to come to that 10% target. Currently, both companies together have close to CHF 100 million EBIT. You add about the CHF 30 million-CHF 40 million coming from the improvements from our business, plus about the CHF 50 million from the synergies, plus about CHF 20 million-CHF 30 million probably from improving the Farnell business. You are at the 10%, perhaps somewhat plus EBIT by 2020.
Maybe last one. How did you go about valuing Premier Farnell? It seems at a first glance, the price is not exactly cheap, but this is probably how things go. In terms of who gets which synergies, because after all, you have a certain amount of synergies that you drive with an M&A transaction like this, and finally, somebody gets those, and they can go one way, the other way, or a bit both ways. How should we think about valuation? How did you approach that? Because the main statement seems to be we have EPS accretion of 30%-40%. Quite honestly, if you leverage the balance sheet in a zero interest rate environment, that's easy to achieve and does not necessarily mean that you're creating value. How did you go about valuing Premier Farnell?
It's probably not the right approach to just take the premium and compare it with the synergies alone. You also have to take into consideration where this kind of business is traded. Obviously, that had to flow into the valuation. As I told you before, typically distribution business is traded in the 10 to 11x EBITDA multiple. If you do the mathematics on our offer, and you take the consensus of EBITDA that is out in the market for Premier Farnell, you come something to a nine-plus EBITDA multiple, which would be, let's say, a fair valuation of the standalone. Including the synergies, if you consider the synergies, it's an attractive proposition, I think, for both sides.
What you're saying is basically you just have taken the view that this is what the multiple should be, that's the peer group multiple, and that's basically what the.
I'm not saying only, but it did flow in, yeah. Then there's always a discussion about price at the end, and both sides have to agree.
Thank you.
One more question about cultures. You have to do a lot of integration work now. You are former Premier Farnell man, so you should know the business quite well. Still, there could be some frictions. How optimistic do you feel about cultures bringing these two cultures together?
Yeah. Certainly, it's something we're very conscious of, and yes, I am now thankfully familiar with cultures of both organizations. I passionately believe actually that the Dätwyler core values in particular, which really drive our culture of our entrepreneurialism, customer focus, about executing brilliantly, that those values are inherent actually in the grassroots of the Premier Farnell business. I think those grassroots will really welcome those values and hence embrace the culture. Yes, there will be some cultural issues, particularly from a geographic point of view, and we'll need to manage those relatively well through open communication and dialogue and consultation, of course. Actually, the Dätwyler four core values are what I believe Premier Farnell has stood for 70 plus years.
Okay.
Markus Boser, VHV Vermögensverwaltung. One understanding question concerning the ideal fit that you mentioned. Have you had a look at other players? You mentioned Mouser, you mentioned Electrocomponents, or was it from the very beginning on clear that it had to be Premier Farnell, and that maybe therefore Neil Harrison was engaged visionary two years ago already? What was the thinking behind?
It would be nice if all could be planned so well. Obviously, when we looked at the list of potential targets, this was really the company top on the list, and for the reasons we've just heard, has to do with the complementarity of products, which would not be the same with Electrocomponents. Then we look at some of the other bigger players. Mouser was mentioned on the chart, Digi-Key. They are either private and want to remain private or are part of a bigger group and hence is not really on the market.
Does it mean that Neil Harrison will become CEO of the new Teco?
For sure, yeah. He will lead the combined entity.
Okay. Thank you.
Any more questions? Do we have any questions?
We have a lot.
Oh, okay.
I think we will not deal with all of them. One of the questions is how would Farnell's semiconductors business interact with Dätwyler's product structure?
Yeah. Very neatly, in fact, as I tried to articulate before, both from a product management perspective, both from a purchasing perspective, Premier Farnell has leadership in the semiconductor arena, both in two sides, just we're very clear. There is the side of supply, and there's also the side of a part of the business, in particular in Mbed, Adafruit, and Raspberry Pi, where we will also be doing some manufacturing. Both of those offer tremendous synergies to the Distrelec business, a little less so to the Reichelt business, and probably not very much at all to the Nedis business. Those synergies are very attractive. Just to be very clear, that's an area of the business that Teco has really been struggling with because that's normally inventory, high technology. You need very strong franchises.
You need deep investment in inventory because it's a global product, but there's lots of variants of the same type of device. To give you an idea, I think someone like a Digi-Key or Mouser would say they've got 1 million different references in that kind of product range, so scale is super important. We will get that scale. If you look at our key markets in particular, where before you were looking at in Sweden, where we generate the more Google searches than anybody else, in Switzerland where we generate more Google searches than anybody else, in other markets. They will then, through those searches, suddenly have access to, through their preferred brands, this amazing electronic proposition.
There's another question here. We mentioned that Mouser generates mid-10s operating margin.
Yeah
It operates from a single distribution center in the U.S.
Yep.
What do you think is the appropriate distribution center footprint for the combined Distrelec Premier Farnell business?
Yeah.
How many distribution centers will it require?
Yeah. Obviously at the moment, there are many distribution centers throughout the business. It's actually a little bit too early to decide or say what we think the footprint would be. What we certainly do need to do is increase capacity in certain of those locations anyway to facilitate the growth. That will be part, in essence, of our strategic review upon completion of the acquisition.
Another question. This is the biggest takeover for Dätwyler so far. The question is whether we plan further acquisitions in Sealings Solutions.
I think. Do you want to answer?
Yeah, you can do that. Yeah.
Yeah. We are working on several projects at Sealing Solutions. As you know, always it belongs two parties to agree. We have several projects at work.
Yeah. Another question is regarding the gross margin decline over the past years, actually. What would be our reaction on that?
Sure. Certainly, I think gross margin, I think is well documented from Premier Farnell's perspective anyway. They articulate, obviously, the impact of FX, some discount management issues, I think was in their last report. Indeed, the product mix that has come through, in essence, Raspberry Pi, which transacts at lower margins. Obviously, if you can try and bundle that together with other products, you get more margin dollars on the transaction. I believe the list prices in the business are now sustainable. I think we have seen, particularly four or five years ago with some U.S. entrants, with some dollar-based pricing, that that did adjust the price position in the marketplace that I think many Europeans were slow to react to. I think that adjustment at list price has now taken place.
I think it's now about driving value and ensuring that where discounts are given, that they drive appropriate volume. I think that's something I'm particularly focused on in the Teco business, and we will apply the same focus to this business.
There's another question regarding antitrust. The question is about why there is no approval needed for the U.K. market, and why did the transaction actually take so long, whether we would expect antitrust issues.
You probably can answer.
You can probably answer that one.
The U.K. Yeah. The U.K. is easy. There is no overlap in the U.K. Premier Farnell does have U.K. business, Dätwyler does not have. We do not expect issues in antitrust at all in the different markets we are both active. I think these were the main points.
Okay.
If any more questions come up in the room here. No? I thank you very much for taking the time to come here, for the interest in our group. There is, I think some drinks and a bit of food outside. Thank you very much