HSE - German Impulse - Model Update
All,
Please find our updated analysis here.
Note: Beta testers can check Clariane on the portal here.
We have done very well the first time round when HSE25 restructured last year. Following this year's LME, however, the structure is no longer as cheap as it was before. It may get cheaper again, but that is why we are waiting. To increase their equity option, PEP have loaded the balance sheet with another €100m of opco FRN, an amount the company can barely carry. The offer was coercive; the take-up competitive; the result prohibitive. We are not saying the balance sheet is unsustainable, but at 10% YTM and 1x FCF Interest Coverage, it's a little too risqué for a growth bet on German impulse retail.
Investment Considerations
We are not taking a position again in HSE24. The company has been doing well, but the LME has fitted another 10% cash-pay debt into the FRNs, and now it is again fully levered. The last 12 months of trading have been encouraging, but management already cautioned that Q326 wouldn't be as strong, and we could imagine that the strong comps will be harder to beat next year.
In this market environment, we therefore stand back from buying these bonds now at 10% yield. Any company with fur on it and putting in a bad performance is currently seeing its bonds gap down. However, the strong bond documentation and presence of the coop should prevent these from being subject to the same fear that is driving down less proven structures at present.
Key Conclusions
HSE’s trading has stabilised, with active customers steady in H1 2026 and e-commerce reaching 52% of group revenue, overtaking TV for the first time on a six-month basis. E-commerce grew 15%, while TV was flat. The business is now only just primarily an e-commerce company, allowing cautious "hopes" of a turnaround. (Recent Trading, Company)
Any turnaround would need to be HSE-specific rather than driven by a sector-wide re-rating. Live and social commerce are established channels, with 40% of Germans having participated and 66% open to doing so. The country has been used to ordering from catalogues for decades. HSE’s Women 50+ customer segment is structurally expanding in DACH, while owned brands and creator-led curation differentiate its offering. (Recent Trading, Industry)
Revenues are rising, but normalising Q2 2025 margins suggest the cost base is largely variable. The German economy remains in real-terms contraction, so we do not extrapolate the recent revenue growth rates. The Christmas quarter is seasonally important for revenue, but its lower margins mean EBITDA is broadly comparable with other quarters. (Recent Trading, Driver, Model)
The first restructuring and the February 2026 sale were executed successfully. However, the post-LME structure leaves the company fully cash-pay levered again. The investment case now depends either on revenue growth exceeding our forecasts or, more plausibly, on legal, restructuring and severance costs falling after years of reorganisation. (Recaps)
Cash conversion remains the constraint on valuation. We assume extraordinary legal and severance expenses halve again, adding €70m to EV and bringing the business close to supporting its new €400m cash-pay bond. If those costs do not fall, debt capacity will be tight and EV closer to €500m. (Recent Trading, Valuation, Model)
HSE generates enough cash to service debt, but FCF interest cover is only around 1x. Growth therefore needs to exceed our forecast to outpace the PIK element on the Senior Secured FRNs. If restructuring fees require cash payment in Q3 2026, the company will need to draw the RCF, as modelled. (Model)
Providence faces a difficult refinancing in 2030: the business needs to support cash-pay debt without the PIK element eventually pushing the bonds out of the money. Even Zalando trades at only 7.5x EBITDA on a 6% margin, limiting the valuation argument based simply on HSE’s transition towards e-commerce. (Valuation)
The post-refinancing indenture is tight, with baskets-only capacity, a 75% supermajority uptier gate, TIA §316(b) disapplied and a €90m super-senior cap, leaving c.€55m of fresh-money headroom. Following a restructuring and an LME, StaRUG at HSE24 International GmbH is the potential endgame venue. (Legal, Recaps)
Risks and Opportunities:
e-Commerce has now overtaken TV. This is no longer a bet on when a small growing business can stabilise a large shrinking one. Moreover, TV attrition has come to a halt in H126. We don't assume it stays here, but we have no reason to think it's falling off a cliff.
Following the restructuring in 2025, the bonds enjoy strong documentation.
Exiting the business should be challenging; there are multiple PE-owned entities and only a few retail buyers. It is possible that someone like AliExpress might be interested, but the pool of buyers is small. HSE generates enough cash to cover interest, so there is no rush. But the cap stack keeps PIKing (even if at a lower combined rate), and if sales growth slows, PEP need a solution.
Even Zalando trades at 7.5x its 6% EBITDA margin. That is better than other T-Commerce businesses trading at 2x, but it leaves little upside to valuations of HSE24. None of these valuations suggests a rosy outlook for consumer discretionary retailers.
Here to discuss this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk