Soriana to Pay $1.35 Billion for Gigante's Stores

Organizacion Soriana SAB, Mexico's second-largest retailer, agreed to buy Grupo Gigante SAB's 206 supermarkets for $1.35 billion, spurring competition among grocers.

Soriana will also pay about 3.63 billion pesos ($335 million) for 80 percent of Gigante's inventories, Pedro Mejia, the company's director of planning and strategy, said. The sale includes 199 supermarkets in Mexico, seven in the U.S., as well as equipment and distribution centers, Soriana said in a statement sent to the Mexican stock exchange.

The purchase will allow Monterrey-based Soriana to expand outside of northern Mexico, where most of its stores are located. It gives Soriana additional stores to compete with Wal-Mart de Mexico SAB, the nation's largest retailer, and Controladora Comericial Mexicana SAB, the third-largest.

``It's more competition for them and especially for Comercial Mexicana,'' said Maria del Carmen Negrete, a retail analyst with Banco Bilbao Vizcaya Argentaria SA in Mexico. ``Soriana can invest what's needed to renovate the stores, which Gigante couldn't.''

Controladora Comercial Mexicana was interested in buying the stores, as was Wal-Mart de Mexico, the Mexico City newspaper Excelsior reported in November. Wal-Mart de Mexico, also known as Walmex, has expanded food sales to attract grocery shoppers to its supercenters.

Last year, Soriana had sales of 58.4 billion pesos, and Gigante's sales were 32.5 billion pesos. Walmex had sales of 199 billion pesos in 2006.

Bank Loans

Soriana plans to pay off the bank loans it takes on to acquire Gigante in about five years and bring its debt level to zero, Mejia said. To free up funds to repay debt, the company will slow store openings to about 10 a year from 40 now, he said.

The company will need to spend $400 million to $500 million over four years to convert the Gigante stores to Soriana's format, Mejia said. Soriana plans to change the name of all the Gigante stores to Soriana within four months of getting approval from Mexico's antitrust authority. That permission will probably come in ``a question of weeks,'' Mejia said.

Soriana may close some stores and distribution centers after evaluating the properties, Mejia said. In one case, Soriana will gain two Gigante distribution centers in Monterrey in addition to the two it already operates in the northern industrial city, he said.

No Land

Soriana won't gain any land in the transaction, and will rent property from Gigante, which owns the land for 45 percent of its stores, and other companies, Mejia said. Soriana owns the property on 88 percent of its 254 stores, he said.

Mejia declined to say how much Soriana might save by adding Gigante's stores. Soriana will employ Gigante's more-than 25,000 employees, he said.

The acquisition will give Soriana 47 stores in the Mexico City area, where the company only operates one store. Penetrating the Mexico City market has been difficult for Soriana because of competition and a lack of available real estate, Mejia said.

``It's one of the most attractive parts of the transaction,'' Mejia said. ``This gives us access to the most important market in the country.''

With the Gigante stores, Soriana will be able to negotiate lower prices from suppliers and compete on more equal footing with Wal-Mart, said Devan Kaloo, who helps manage $9 billion of emerging market equities for Aberdeen Asset Management Ltd. in London.

Margin Boost

``It increases the size of the company significantly, and that allows them to be able to potentially boost margins through better purchasing power,'' Kaloo said. ``It gets them into new areas of Mexico where they have been struggling to open markets.''

Kaloo's firm is the second-largest holder of Soriana shares, according data compiled by Bloomberg.

The acquisition doesn't include shares of Gigante, which will spin off the supermarkets, Gigante said in a statement. Gigante said it will focus on real estate and will evaluate options for its remaining operations, which include Super Precio convenience stores and Toks restaurants, as well as joint-ventures with the OfficeMax and RadioShack chains.

Soriana rose 6.1 percent to 33.65 pesos in Mexico City trading as of 4:11 p.m. New York time. The stock is up 42 percent this year. Gigante shares climbed 14 percent to 28.50 pesos. The shares have more than doubled in 2007.

The Federal Competitions Commission, the antitrust authority, said it will rule on the acquisition before Dec. 21 when its officials go on a two-week vacation for the Christmas holiday.