BAA pays pounds 406m for US duty-free giant

BAA, the owner of Heathrow and Gatwick Airports, yesterday announced a huge expansion of its duty-free retailing business through a $674m (pounds 406m) takeover that elevates the group into second place in the world's $20bn tax-free shopping market.

The agreed bid for Duty Free International (DFI) of Connecticut, the fifth-biggest duty and tax-free company, means retailing will account for up to 60 per cent of BAA's revenues. The deal, which is also the largest in BAA's history, emphasises the group's transformation into a property and retailing business as it approaches its tenth anniversary as a privatised company later this month.

Though BAA had first approached DFI last December, it waited to finalise the deal until it knew its windfall tax bill. The lower-than-expected windfall levy of between pounds 70m and pounds 100m left the group relatively unscathed, though BAA was forced to bring forward the announcement by a week after DFI shares were suspended on rumours in New York.

It will create a business with sales of more than $1bn and around 9 per cent of the global duty-free market. The leader is DFS, another US-based group owned by the French luxury goods company LVMH, with about 13 per cent. BAA predicted the world market would expand by at least 15 per cent a year for several years.

More than half of DFI's sales were from in-flight and airport retailing, while a further 36 per cent came from tax-free shopping outlets on the Canadian and Mexican borders with the US. DFI, which has 175 stores and employs 2,000 people, began life in 1983 and grew rapidly following its flotation in 1989.

Sir John Egan, BAA's chief executive, admitted the takeover was partly a move to defend the group's duty-free interests after 1999, when tax- free shopping on flights between European Union countries could be suspended. It would also give BAA's operations greater strength to bid for European concessions, should the EU agree to let duty-free shopping continue. Most contracts come up for renewal on 30 June 1999.

"There is a defensive quality, I have to say, yes," said Sir John. Describing the possible abolition of intra-EU duty-free sales as a "crisis", he predicted the concession would remain after heavy lobbying from operators.

The offer values DFI shares at $24, a 19 per cent premium to the closing price on 1 July. BAA said DFI investors speaking for 43 per cent of the company had given irrevocable undertakings to accept the deal.

Sir John said BAA had identified cost savings of pounds 15m over three years from the deal, largely through tougher purchasing power. He said there was no overlap between the two operations and no job losses were planned. Four senior DFI executives had been given contracts to stay with the group for three years.

BAA will pay for DFI from existing resources, setting part of the cost against a pounds 260m bond issue in January 1996.