X5 to Buy Kopeyka for $1.1 Billion, Beating Wal-Mart

X5 Buys Kopeyka
The purchase of closely held Kopeyka will add about 700 stores in Russia. Photographer: Alexander Zemlianichenko Jr./Bloomberg

X5 Retail Group NV, Russia’s largest retailer, agreed to acquire discounter Kopeyka for 35 billion rubles ($1.1 billion) in cash to reinforce its market leadership, beating off interest from Wal-Mart Stores Inc.

X5, controlled by billionaire Mikhail Fridman’s Alfa Group, will also assume net debt of no more than 16.5 billion rubles, bringing the total transaction value to 51.5 billion rubles, the Moscow-based company said today in a statement.

The purchase of closely held Kopeyka will add about 700 stores in Russia, where rising commodity prices and consumer spending are fueling an economic recovery. Wal-Mart’s attempts to enter the country by acquisition have been frustrated by disagreements on price, the Bentonville, Arkansas-based company said in June. The world’s largest retailer said today it was unable to reach an agreement to acquire Moscow-based Kopeyka.

“We expect Wal-Mart to enter the Russian market within two-to-three years, and we think that they will seriously consider M&A opportunities,” Mikhail Terentiev, a London-based analyst at Nomura Holdings Inc., said in a phone interview. Kopeyka will strengthen X5’s leadership of the market, he said.

Wal-Mart has pursued several acquisition opportunities in Russia, international chief Doug McMillon said in June. Spokesman Kevin Gardner said today that the company will continue “to look at our options” in the country after failing to reach “mutually agreeable commercial terms” to acquire Kopeyka.

X5 Shares Jump

X5 shares rose $2.80, or 6.8 percent, to $44 at the 4:30 p.m. close of trading in London, where the stock has its main listing.

The transaction price values Kopeyka at 12.1 times estimated earnings before interest, taxes, depreciation and amortization, according to Maria Kolbina, an analyst at VTB Capital in Moscow. The compares with 14.9 times for X5 and 10.8 times for competitor OAO Dixy Group, Kolbina wrote in a note.

Russia has attracted foreign investment as its economic growth is forecast to accelerate to 4.3 percent next year from 4 percent in 2010, according to the International Monetary Fund. PepsiCo Inc. last week agreed to buy control of Wimm-Bill-Dann Dairy & Juice Co. for $3.8 billion to become the country’s biggest food-and-beverage company.

Adding Kopeyka’s 317 discount stores in Moscow and surrounding areas to its own 422 outlets will give X5 a market share of about 13 percent in the capital city, leaving “significant” room for growth, X5 said. The Kopeyka stores will be converted to X5’s Pyaterochka brand over two years.

Acquisition Funding

“Kopeyka should perfectly complement X5’s Pyaterochka portfolio, further strengthening the company’s lead in the discounter segment,” Mikhail Krasnoperov, an analyst at Troika Dialog in Moscow, said in an e-mailed research note.

X5 said it has identified “substantial scope” to improve efficiency at Kopeyka through larger-scale merchandise purchasing and reduced administration costs.

The purchase from billionaire Nikolai Tsvetkov, who also controls UralSib Financial Corp., will be partly financed with a five-year 30 billion-ruble loan from OAO Sberbank, X5 said. The rest will be funded from existing credit facilities.

After the transaction, net debt will be “slightly” more than 3 times earnings before interest, taxes, depreciation and amortization, which is “well within the company’s balance sheet target ratios and credit facilities covenants,” X5 said.

Russian regulators have approved the deal, which should be completed by the end of this month, X5 said.

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