International Design Group Rated 'B' On Consolidation Of Flos, Louis Poulsen, And B&B Italia; Outlook Stable

  • Private equity groups Investindustrial and The Carlyle Group have created International Design Group SpA (IDG), consolidating Flos, Louis Poulsen, and B&B Italia, three leading companies in the high-end design market.
  • Investindustrial and Carlyle jointly own a 90%-95% stake in the group, while IDG's senior management owns the remaining 5%-10%.
  • As part of the transaction, IDG issued €720 million senior secured notes and a €100 million super senior revolving credit facility, and shareholders contributed approximately €1.01 billion in common equity.
  • We are assigning our 'B' rating to IDG and its senior secured notes.
  • The stable outlook reflects our view that the group will successfully consolidate the three entities, maintaining free operating cash flow generation above €25 million, adjusted debt to EBITDA of 6.0x-6.5x, and EBITDA interest coverage at about 2.5x in 2019-2020.
MILAN (S&P Global Ratings) Feb. 8, 2019--S&P Global Ratings today assigned its 
'B' long-term issuer credit rating to International Design Group SpA (IDG), an 
Italy-based group operating in the high-end design market. The outlook is 

At the same time, we assigned our 'B' issue rating to the €720 million senior 
secured notes (€400 million fixed rate notes and €320 million floating rate 
notes) maturing in 2025. The recovery rating on the notes is '3', indicating 
our expectations of meaningful recovery prospects (50%-90%; rounded estimate: 
55%) in the event of payment default.

IDG has been created by private equity groups Investindustrial and The Carlyle 
Group, consolidating Flos, an Italian lighting producer, Louis Poulsen, a 
Danish lighting producer, and B&B Italia, an Italian furniture producer. 
Investindustrial and Carlyle jointly own a 90%-95% stake in the group, while 
IDG's senior management owns the remaining 5%-10%.

Investindustrial acquired Flos and B&B Italia in 2014 and 2015 respectively 
and, leveraging their managerial capabilities, the two companies reported 
solid revenue growth over 2015-2017 (about a 10% compound annual growth rate 
[CAGR]) and stable profitability of about 20% for B&B Italia and about 25% for 
Flos. Recently, Investindustrial acquired Denmark-based Louis Poulsen. The 
creation of IDG follows Carlyle's entry into the investment. Caryle and 
Investindustrial have a combined stake of 90%-95% (equally split) in IDG's 
equity, supporting the group's expansion over the following years, both 
organically and with selective acquisitions.

This transaction is part of the consolidation trend we have been observing in 
the high-end design market over the past few years. The market is still 
characterized by several small independent companies, which are desirable 
targets for industrial or financial investors aiming to invest in iconic 
brands with strong heritage in order to foster international growth and 
improve financial strength. 

The high-end design market is very fragmented, and we consider it to be 
subject to discretionary consumer spending in both channels operated by the 
group. In the business-to-customer (B2C) channel (about 73% of sales), demand 
stems from real GDP growth and development in the housing market. The demand 
in B2C is also subject to the risk that homeowners could defer purchases in an 
economic downturn. In the business-to-business (B2B) channel (about 27% of 
sales), demand for luxury furniture products is linked to remodeling projects 
at commercial properties. While we acknowledge the shorter replacement cycle 
in this segment than with B2C, demand could be affected by the decision to 
defer remodeling activities. Positively, the group enjoys a diversified 
end-customer base, operating in multiple industries from hospitality to luxury 
retail. Key customers in the B2B channel are Apple, Bentley, Rolex, United 
Airlines, Bulgari Hotels, and public administrations (mainly at Louis 

The group's product offerings are mainly high-end lighting solutions, 
accounting for 60% of total sales, while the remaining 40% are generated from 
the high-end furniture market (about 28% in the living and bedroom segment and 
the remaining in the kitchen and other furniture segments). We evaluate 
positively the group's omnichannel distribution strategy, as it enables the 
group to reach a diversified customer base through its wholesale partners (66% 
of sales), owned retail network (7% of sales), and contracts with commercial 
clients (27% of sales). The direct online channel is still very marginal, with 
about 1% of the sales, but the development of this channel is part of the 
group's strategy.

IDG has a premium-price positioning, reflecting positive brand awareness and a 
high level of design, guaranteed by a product portfolio comprising iconic and 
new products.

We understand that Flos, B&B Italia, and Louis Poulsen have maintained 
longstanding relationships with famous designers and architects over time and 
that several products in their portfolio have a long lifetime. The ability to 
maintain a strong brand awareness through iconic products while introducing 
successful new ones represents a key competitive advantage, and helps attract 
and retain new designers. In fact, despite the popularity of iconic products, 
the group's success relies on its ability to remain very contemporary, 
leveraging its research and development capabilities and introducing new 
products to accommodate new market trends in technology and new materials, for 

The group's sales increased by about 10% CAGR over 2015-2017, posting €535 
million in revenues and EBITDA of €122 million in the 12 months ending June 
30, 2018. This was supported by organic and external growth via selective 
acquisitions to diversify its product offerings and geographic footprint. 
Today, IDG has a global presence, with no single country accounting for more 
than 15% of sales (Italy represents 15%). The Americas and the fast-growing 
Asia Pacific region account for 17% and 14% of sales respectively, and rest of 
the world accounts for 5%. The rest of Europe generates 49% of total sales, 
where IDG has relatively strong exposure to solid economies like Germany and 
the Nordics.

IDG's pro forma reported EBITDA margin was in the range of 21%-22% in 2017, 
mainly thanks an EBITDA margin of about 25% for Flos. B&B Italia reported 
profitability close to 20%, while Louis Poulsen's was about 19% at year-end 
2017, supported by significant improvements over the past few years in 
manufacturing efficiency and price adjustments, and a strategic switch to the 
more profitable B2C segment. 

We note that IDG's EBITDA margin is higher than the broad durable goods market 
average, and it compares well with other rated luxury players in different 
segments. It is supported by the group's premium price positioning, its 
flexible cost structure (approximately 61% of variable costs), and its 
asset-light business model. In fact, distribution relies mainly on wholesales 
partners (66% of total sales) and production is mainly outsourced to 
third-party suppliers. The group adopts a "make-to-order" approach (63% of 
sales), limiting significant working capital requirements.

We anticipate that the combination of Flos, Louis Poulsen, and B&B Italia 
under the same group will generate revenues synergies (i.e. retail 
optimization, new multi-brand directly operated store openings, and direct 
e-commerce) and cost optimization from shared functions. We expect limited 
overlapping of Flos and Louis Poulsen, reflecting their distinctive brand 
identities based on different design philosophies, a slightly different 
geographic focus, and Louis Poulsen's relatively greater focus on the B2B 

Our business risk profile assessment also incorporates execution risks 
associated with the successful integration of the three entities, including 
the deployment of a new joint direct e-commerce platform, implementation of a 
centralized wholesale database, and of new multi-brand store openings. 

Our financial risk profile assessment reflects IDG's financial sponsor 
ownership, and our forecast that the group will post adjusted debt to EBITDA 
of 6.0x-6.5x on average over 2019-2020. Our debt calculation includes €720 
million of senior secured notes, a limited amount of pension liabilities (€6 
million-€7 million) and €65 million-€70 million of operating leases liability. 
Our base case assumes, as indicated by IDG, that the cash injected by the 
group's shareholder is common equity, with no shareholder loan or other 
noncommon equity instruments in or above the restricted group. 

The financial risk profile is supported by adjusted EBITDA interest coverage 
of about 2.5x over 2019-2020, and by our forecast of free operating cash flow 
(FOCF) of at least €25 million from 2019. 

We believe that part of the cash generation could be used to finance some 
bolt-on acquisitions, since the group intends to expand its geographic 
footprint and product offering. 

The stable outlook on IDG reflects our view that the group will successfully 
combine Flos, B&B Italia, and Louis Poulsen without incurring significant 
exceptional costs. We expect IGD will maintain a reported EBITDA margin of 
20.0%-20.5% in 2019, supported by premium price positioning and solid 
relationships with architects, although this is offset by some integration 
costs. We assume that FOCF will be over €25 million in 2019, supported by 
IDG's asset-light business model.

We project IDG will maintain S&P Global Ratings-adjusted debt to EBITDA of 
6.0x-6.5x in 2019 and EBITDA interest coverage at about 2.5x over 2019-2020.

We could lower the rating if FOCF weakens and approaches zero, and if EBITDA 
interest coverage falls to 2.0x or less. In our view, this could happen if an 
economic downturn reduces demand for high-end design products, or if the 
company experiences significant disruption caused by the consolidation of 
Flos, B&B Italia, and Louis Poulsen. 

A negative rating action could also occur if the group makes large debt-funded 
acquisitions that materially increase leverage. We could also downgrade the 
group if we observe deterioration in the group's liquidity position.

We could upgrade IDG if its credit metrics improve and adjusted debt to EBITDA 
remains consistently below 5x and there is a clear commitment from the private 
equity group owners to maintain the leverage below this level.
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