Carrefour Gains After Selling Colombia Unit to Cencosud

Carrefour SA (CA) rose in Paris while Cencosud SA (CENCOSUD) slumped the most in more than a year in Santiago after the French company agreed to sell its Colombian stores to the Chilean retailer for 2 billion euros ($2.6 billion).

Carrefour shares rose 5.9 percent to 18.36 euros at the close of trading in Paris, the steepest advance since Aug. 30. Cencosud slid 6.2 percent, the most since August 2011, after announcing plans to sell $2.5 billion of new stock and bonds.

The acquisition allows Cencosud to tap rising consumer spending in Latin America as economic growth fuels an expansion of the middle class. Carrefour, the world’s second-largest retailer, is selling its Colombian grocery stores as part of a strategy to exit markets it doesn’t dominate.

The sale is “an incredible exit” for Carrefour from a country where it first opened a store in 1998, said James Grzinic, an analyst at Jefferies International. The price was “stunning” and will make a “very useful dent” in Carrefour’s average net debt of 8 billion euros ($10 billion), he said.

The price is higher than for recent transactions in the food retailing industry, reflecting the potential for growth in Colombia, where the economy expanded faster than Mexico, Brazil and Argentina in the second quarter. The retail market is dominated by Casino Guichard-Perrachon SA’s (CO) Almacenes Exito SA. (EXITO)

Deal Multiple

The price to be paid by Santiago-based Cencosud includes debt and represents a multiple of 20 times estimated earnings before interest, tax, depreciation and amortization, according to Grzinic. That compares with the 13.6 times that Wal-Mart Stores Inc. (WMT) paid for control of Chile’s Distribucion y Servicio D&S SA in 2009, according to data compiled by Bloomberg.

The median multiple for 10 takeovers of food retail businesses since 2004 is 11.9 times, the data show.

“Qualitatively speaking, we think the transaction is positive” for Cencosud, Alonso Aramburu, an analyst at Banco BTG Pactual SA, said in a note to clients today. The Chilean company was advised by JPMorgan Chase & Co.

Carrefour is cutting jobs and exiting overseas markets to generate cash and cut debt as part of a three-year turnaround plan formulated by Chief Executive Officer Georges Plassat.

The deal “indicates Plassat is prepared to sell non-core assets and the strategy is on track,” said Caroline Gulliver, an analyst at Espirito Santo who rates the stock buy.

Turkish Business

Carrefour is also considering a combination of its Turkish business with Migros Ticaret AS, a rival supermarket chain owned by private-equity firm BC Partners Ltd., three people with knowledge of the situation said last month.

The retailer, based in Boulogne-Billancourt, France, also plans to exit Singapore by the end of the year and paid 220 million euros to leave Greece. It has also put Poland and Indonesia under review for possible sale.

The Colombia unit, which had net sales excluding gasoline of 1.5 billion euros in the 12 months through June 30, will add to Cencosud’s food, home-improvement and department-store businesses in the country. Carrefour has 72 hypermarkets, 16 convenience stores and four cash-and-carry stores in Colombia.

Carrefour, which was advised by Credit Suisse, and Cencosud didn’t disclose how much of the deal comprises debt, which Espirito Santo’s Gulliver estimated at 200 million euros.

Cencosud, controlled by billionaire Horst Paulmann and based in Santiago, signed a $2.5 billion credit contract with JPMorgan (JPM) to finance the transaction, which is scheduled to be completed by the end of the year.

Share Sale

The Chilean retailer said it will seek shareholder approval to sell $1.5 billion in new shares. Cencosud also plans to sell $1 billion of 10-year U.S. dollar bonds, Chief Executive Officer Daniel Rodriguez and Chief Financial Officer Juan Manuel Parada told reporters today in Santiago.

The bonds will be sold within 90 days to tap “good” market conditions, while the share sale may take place within 120 days, they said. Cencosud sees no risk of breaching debt covenants and expects its ratings to be maintained, they said.

The extra yield, or spread, investors demand to buy Cencosud’s dollar bonds due in 2021 instead of U.S. Treasury debt rose 22 basis points, or 0.22 percentage point, today to 268 after reaching a 14-month low reached yesterday.

Colombia’s consumer industry is dominated by small neighborhood shops and markets, said Mauricio Hernandez, a Bogota-based analyst at Corredores Asociados SA. This, combined with a growing economy, offers retailers a high potential return, Hernandez said.

Growing Economy

“Chilean retailers are entering Colombia in an aggressive way,” Hernandez said by telephone. “It’s a market with a lot of potential, with good consumption per capita, a good economic climate and a strong outlook for growth and retail.”

Colombia’s retail sales rose 1.2 percent in August from the same period a year earlier, the national statistics agency said yesterday. SACI Falabella (FALAB), Chile’s largest retailer by market value, and Empresas La Polar SA (LAPOLAR) also have stores in Colombia, where Exito has a 43 percent share of the market.

“It’s an attractive market to be in, and I think it helps provide economies of scale for the company within Colombia, which is something that they were lacking,” said Christopher Disalvatore, a senior analyst at IM Trust SA, in a telephone interview from Santiago.

Still, at about 1.3 times sales, Cencosud may have paid a “high price” for the Carrefour assets, Disalvatore said. The ratio is higher than the average Cencosud has paid for its previous acquisitions, he said.

Paulmann Stake

The Colombian economy grew 4.9 percent in the second quarter from a year earlier, faster than Mexico, which grew 4.1 percent, Brazil and Argentina. Colombia’s Finance Ministry calculates the country overtook Argentina this year to become Latin America’s biggest economy after Brazil and Mexico.

Cencosud is the third-biggest retailer in Latin America by sales after Wal-Mart de Mexico SAB and Brazil’s Cia. Brasileira de Distribuicao Grupo Pao de Acucar, data compiled by Bloomberg show. Besides Chile and Colombia, Cencosud also does business in Argentina, Peru and Brazil.

German-born Paulmann, 77, sold shares in New York for the first time this year, convincing investors of his ability to navigate a global slowdown and deliver earnings growth from a company cobbled together from at least 16 acquisitions in the past decade. He’s the most-active deal maker in Latin American retail, data compiled by Bloomberg show.

Under Paulmann’s command, what began as a family-run restaurant has turned into a $16 billion retail empire with 726 supermarkets, 81 home-improvement stores, 74 department stores and 25 shopping malls. Paulmann personally controls a 40 percent stake in Cencosud, with another 25 percent in the hands of family members, according to a May 25 prospectus filed with the U.S. Securities and Exchange Commission.

To contact the reporters on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net; Eduardo Thomson in Santiago at ethomson1@bloomberg.net

To contact the editor responsible for this story: Andrea Snyder at asnyder5@bloomberg.net

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