WH Intermediate LLC 'B-' Ratings Placed On CreditWatch Positive On Intellectual Property Joint Venture With Express Inc.
- WH Intermediate LLC (d/b/a WHP Global; WHP), a brand acquisition and development platform, announced its investment in an intellectual property joint venture with Express Inc. for $260 million to be funded with a combination of an incremental term loan raise, revolver borrowings, balance sheet cash, and equity from its existing owners. The final combination and capital structure is to be determined.
- The acquisition is significant as it will increase the size of the company to an estimated $200 million in annual revenues from $140 million in pro forma last-12-months revenue ended Sept. 2022. The acquisition will also create an arm's length retail operation that will allow the company to better compete for future acquisitions and should fuel future growth.
- Additionally, the company has successfully executed on its Toys 'R' Us acquisition and partnership with Macy's Inc. over the last year which demonstrates its ability to manage brands.
- We estimate the acquisition will be relatively leverage neutral based on preliminary terms and that S&P Global Ratings-adjusted leverage will remain near 5x (subject to due diligence and final terms).
- Therefore, we placed all our ratings on WH Intermediate, including our 'B-' issuer credit rating, on CreditWatch with positive implications.
- The CreditWatch placement indicates that we could affirm our ratings or raise the ratings by one notch. We will resolve the CreditWatch placement when we receive additional information about the terms of the transaction that enable us to assess its financial impact on the company.
SAN FRANCISCO (S&P Global Ratings) Dec. 9, 2022—S&P Global Ratings today took the rating actions listed above.
We view WHP's partnership with Express as a transformational step in its acquisitive growth strategy, providing the company with a dedicated retail licensee operation that should greatly expand its revenue base. Following the transaction, we expect WHP's partnership with Express to provide the company with access to a dedicated retail operating partner that it has been lacking. The proposed acquisition will involve the transfer of Express' intellectual property (IP) into a new IP joint venture with an implied value of approximately $400 million that will be 60% owned by WHP and 40% by Express. WHP will also be making a private investment in public equity (PIPE investment) to acquire 5.4 million newly issued shares of Express at $4.60 per share, representing an approximate pro forma ownership of 7.4%. Express will be remain public and own 100% of its operations. It will also enter into an exclusive long-term license agreement with multiple renewal options as part of the joint venture, allowing WHP to receive guaranteed minimum royalties from Express that will increase the company's scale, a key constraint for our existing ratings. The transaction will also create new opportunities to further grow royalty revenue via new global geographic licenses thanks to Express' large retail footprint of stores. We expect cash earnings in the venture to be distributed quarterly to both parties on a pro rata basis.
We expect WHP will fund the transaction with a combination of debt, cash, and equity, but the final capital structure has not been determined. We believe the impact to its credit metrics will largely be offset by enough incremental EBITDA from its higher royalty revenues, effectively remaining relatively leverage-neutral to its S&P Global Ratings-adjusted pro forma leverage of 5.2x for the 12 months ended Sept. 30, 2022. We expect the acquisition, will increase WHP's size and scale while maintaining leverage below 6.5x, our current upgrade threshold. We expect WHP will continue to manage leverage over 5x given the company's financial sponsor ownership and acquisitive growth strategy.
Our existing ratings are constrained by one notch given the company's limited operating track record of growing brands and uncertainty of our prior forecast due to the company's highly acquisitive and aggressive growth strategy. The company's largest brand is Toys 'R' Us, and the company has successfully executed on its partnership with Macy's over the last year. We believe the acquisition of Express can grow its brands and give it additional scale.
We expect to resolve the CreditWatch placement once we receive additional information regarding the sources and uses to fund the transaction (and the pro forma capital structure), have performed due diligence on Express' impact to the company's scale, and have reviewed the terms of the new retail operating entity. Upon resolution of the CreditWatch we could affirm our ratings or raise them (including the issuer credit rating) up to one notch.
ESG credit indicators: E-2, S-2, G-3
Related Criteria
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- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
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| Primary Credit Analyst: | Waylan Yee, San Francisco + 1 (212) 438 0246; waylan.yee@spglobal.com |
| Secondary Contact: | Amanda C O'Neill, New York + (212) 438-5450; amanda.oneill@spglobal.com |
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