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Video Q&A : Rexel CEO Jean-Charles Pauze comments on Hagemeyer acquisition

EuroBusiness Media (EBM) : Rexel, a leading worldwide distributor of electrical supplies has just finalized the acquisition of Hagemeyer. Jean-Charles Pauze, welcome. You are the CEO of Rexel. Now that you have finalized the acquisition of Hagemeyer, how would you describe the strategic rationale of this major transaction ?

Jean-Charles Pauze (JCP) : Well actually the combination of Rexel and Hagemeyer is a historic step. Not only are we reinforcing our position worldwide, but we are becoming a very strong number two in Europe and a true challenger. We are creating a platform – a bigger platform – on which we will use at best our levers for profitability and value creation. In Europe we will add, actually, more countries and we’ll also become stronger in countries where we already are. It’s a deal which also helps the whole restructuring of the industry, so the name of the game, as you understand, is value creation with existing and known levers, on a bigger scope .

EBM : You are presenting today the new profile of the group. How would you describe the main highlights of Rexel’s profile, post-transaction ?

JCP : I highlighted the strengths that we will gain in Europe, and actually, Europe will represent now 60 % - or close to 60 % - from our total turnover for the group, whilst we were around 45 % before. And it is new countries : Baltic countries (three countries), Finland, Norway – so new territories – and it’s also becoming real leaders, and relatively strong leaders, in the UK and in Spain, where we were present, but not at all in number one position, and also gaining a number two position in Germany with a very progressive platform versus the position we had before. Over all, actually, the total turnover of the group on a pro forma 2007 will be 14.3 billion. Actually this means that we are, in one move, gaining 30% more volume of activity for the whole group, and I do remind that compared to what we have been doing in the last three years, this will really double the size of the group in the last three years. So that is really for us a major step. It increases our branch network, and our geographical presence through a broader branch network : actually in Europe we will have a 50% increase in our branch network.

EBM : What will the new group represent in terms of financials ?

JCP : The financial highlights are pretty simple. On a 2007 pro forma basis, i.e. taking into account the entities that we will keep from Hagemeyer, we will represent a group of 14.3 billion euros pro forma 2007. In terms of adjusted EBITA, we will be at 771 million euros, a cash flow of 747, actually, which is on a working capital level of 13.2 % of our turnover. As you realize, I mean, in terms of EBITA margin adjusted, it is slightly below what we have been posting as Rexel alone, so this is a pure mechanical effect, you know, of merging entities of different levels of performance. But this also acknowledges the fact that we have a real potential of improving this EBITA, and hence the opportunity represented in value creation by this acquisition.

EBM : How do you plan to get synergies from this acquisition ?

JCP : Before talking synergies of the acquisition, I just want to come back on our experience. Since 2004 we have been acquiring 25 companies and integrating them, and this has been very positive to the development of Rexel. We also in 2006 have acquired Gexpro, the GE supply division, and you know that we are in advance on our plan in posting the synergies of this acquisition. So, with Hagemeyer, actually, we will use all this experience ; we will naturally have the synergies related to the whole purchasing side, creating stronger relationships particularly with our strategic suppliers. In the case of Hagemeyer we will have stronger administrative synergies because the corporate structure of Hagemeyer as a group will be discontinued medium term, and naturally we have all the operational back-office synergies in the different countries that we will work in — this is IT, this is logistic synergies and different sales network synergies. Over all we expect in 2011 running, to have a level of synergies which will be 1.5 % of the turnover that we are actually acquiring. And on top, I really want to add that because, out of prudence, we don’t post much revenue synergies, but they will be there. We will increase our platform and through that create more opportunities to develop turnover, particularly on main project and key accounts.

EBM : You have signed an agreement with Sonepar to sell off Hagemeyer’s North American, Asian-Pacific and some European assets. What is the timetable for the disposals ?

JCP : Well, actually, that is true ; we have been signing this agreement which also integrates the main parameters already of the valuation and the disposal process, and we expect to have those disposals made within the next six months.

EBM : The Hagemeyer transaction obviously impacts the financial objectives of Rexel for 2008 and in the medium term. What are your new financial targets ?

JCP : For 2008 we anticipate a limited growth including some bolt-on acquisitions. In terms of adjusted EBITA margin and rebased 2007 pro forma, we will be on a comparable basis, and in terms of the working capital and cash flow improvement we will be in line with our mid-term objectives. As far as the mid-term objectives, we see a growth for 2011 – up to 2011 – between 4 to 6 %, also with bolt-on acquisitions up to half of this growth rate. In terms of our EBITA adjusted improvement – we see 100 basis points, i.e. that we will be in 2011 at a level which will be higher than the level that we have been posting as Rexel alone. And in terms of the working capital, we will anticipate and expect an improvement which will drive our working capital down to 12.5 % of our turnover, an improvement of a bit more than 70 basis points, And as far as the debt coverage by the EBITA, we will come to a level between 2 to 3 times, from a level which will be, after the acquisition of the Hagemeyer entities, which will be around 4.

EBM : After the Hagemeyer acquisition, what could be the next steps for Rexel ?

JCP : This acquisition is really a transformational. It’s a historic acquisition and basically it gives us two things : first, a new growth capability, second, a possibility to go catching and creating value. So actually with that we will be more powerful, i.e. we will go catching more customers, and, probably more importantly, will work more also with our customers in more places. Second, we will also be more resilient – more resilient because of the geographic spread, because of the end-market spread, more resilient as well because with this end-market spread we are increasing the share of the renovation and maintenance business that we do, which we all know are more resilient than the pure investment business. And thirdly, we are becoming more attractive and once more, we are giving the possibility to levers – performance levers – that we know, that we have been putting to work for many years before, a new scope, really, to exercise themselves creating value. So, more powerful, more resilient, and clearly more attractive in terms of value creation. These are really the new steps that we are entering for Rexel now.

EBM : Jean-Charles Pauze, CEO of Rexel, thank you very much.