Investing.com -- Shares of Elis (EPA:ELIS) slumped by 16% on Friday following a Reuters report that the French workplace supplies company had made an acquisition offer for Vestis (NYSE:VSTS), the former uniform rental division of Aramark (NYSE:ARMK).
Vestis, valued at $3.3 billion, has recently become a target for acquisition due to its recent struggles and the loss of key clients.
As per analysts at J.P. Morgan, while the acquisition of Vestis could present Elis with a significant opportunity to establish a stronger presence in the U.S. market, it also comes with several challenges. The U.S. uniform services sector, valued at approximately $42 billion, represents a substantial growth opportunity.
“We expect Elis’ market entry would present a slightly greater negative for UniFirst (NYSE:UNF),” the analysts said.
Morgan Stanley indicates that financing the acquisition could pose challenges for Elis. In FY23, Elis recorded free cash flow of €303.6 million.
When Elis undertook a similarly sized deal, the acquisition of Berendsen in 2017, it raised equity to support the transaction. As of December 2023, Elis's leverage was at 2.0x, with guidance to reduce it to 1.8x by year-end.
“We note Elis' leverage has decreased from ~5x since the Berensden acquisition, but leverage has historically trended at c.3-3.5x for sustained periods of time,” the analysts said.