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Carrefour Brazil Merger Plan Sets Up Casino Power Struggle

Carrefour Brazil Merger Plan, Power Struggle With Casino
The plan may be thwarted by Casino, which jointly controls Pao de Acucar with the Diniz family and last week raised its stake in the Brazilian company to 37 percent. Photographer: Owen Franken/Bloomberg

Carrefour SA, the world’s second-largest retailer, is considering a proposal to merge its Brazilian assets with those of Cia. Brasileira de Distribuicao Grupo Pao de Acucar, setting up a power struggle with French rival Casino Guichard-Perrachon SA.

The combination, which would give Carrefour control of Brazil’s largest retailer, was proposed by Gama, an investment fund managed by Banco BTG Pactual SA. Gama would become the biggest shareholder in Boulogne-Billancourt, France-based Carrefour with an 11.7 percent stake, which may increase to as much as 17.7 percent, according to a statement released today.

Casino, which jointly controls Pao de Acucar with the Diniz family, said the plan violates a 2005 agreement with Abilio Diniz for it to become the sole controlling shareholder in 2012. Casino bought 24 percent of the supermarket chain in 1999 for $1.1 billion and paid $860 million for another 11.6 percent in 2005. It raised the stake again last week to 37 percent, strengthening its position after discovering its partner held talks with Carrefour, two people familiar with the matter said in May. Today’s proposal is a “long-standing illegal planned financial transaction,” Casino said in a statement.

“The battle is likely to be very bloody,” James Grzinic, an analyst at Jefferies International Ltd. in London, said in a note to clients. “The legal opposition from a ‘wronged’ Casino could pose a meaningful obstacle.”

‘Hostile’ Proposal

Casino, which gets a quarter of sales from Latin America, said the interests of its shareholders “seem threatened” by Gama’s proposal, which it called “hostile.” Brazil is among the emerging countries that are helping offset falling earnings in the Saint-Etienne, France-based company’s domestic business.

The planned transaction won’t be completed without Casino’s approval, said Percio de Souza, a partner at Estater Gestao e Financas, which advised on the deal, in Sao Paulo today.

Abilio Diniz said he will evaluate the merger plan with Casino. A final decision will respect the law and the Pao de Acucar shareholder agreement, he said in an e-mailed statement.

Carrefour hired Lazard Ltd. to study a merger between its Brazilian unit and Pao de Acucar, Journal du Dimanche reported in May, without saying where it got the information.

Capital Injection

Carrefour said its board will review Gama’s plan in coming days. Under the proposal, Gama would receive a capital injection from the Brazilian National Development Bank of 2 billion euros ($2.9 billion) and debt financing for 500 million euros.

The deal would create a company with combined 2011 revenue of more than 30 billion euros and save about 700 million euros a year, Gama said. Brazil is the second-largest contributor to sales for Carrefour after France.

“The industrial logic is compelling,” said Grzinic. “The development is a positive for Carrefour, and may well trigger outright approaches for Latin American operations.”

Carrefour rose 99 cents, or 3.7 percent, to 27.44 euros at the close of Paris trading. The stock has slid 11 percent this year. Casino fell 3.7 euros, or 5.6 percent, to 62.2 euros. Pao de Acucar preferred shares rose as much as 5.5 percent to 68.59 reais in Sao Paulo trading.

The proposed merger would be reviewed by local regulators together with other recent acquisitions by Pao de Acucar, the president of Brazil’s antitrust agency said.

Antitrust Regulator

The antitrust regulator must assess the impact of the planned deal jointly with Pao de Acucar’s acquisition of Casa Bahia Comercial Ltda and Globex Utilidades SA, Fernando de Magalhaes Furlan said in a telephone interview from Brasilia.

Grzinic at Jefferies said regulatory risk may be less than expected. “Local authorities may have already given their implicit approval to the transaction,” he wrote.

Under the plan, Gama would initially get two seats on Carrefour’s board and a third in 2013, Carrefour said. The fund would act in concert with a shareholder group that includes Blue Capital SARL, according to the French retailer.

Brazil’s state development bank would have an 18 percent stake in the merged business, said de Souza. Banco BTG Pactual, a Brazilian investment bank controlled by billionaire Andre Esteves, would have a 3.2 percent stake in the company that will be created, he said. Esteves bought Pactual from UBS AG in 2009.

“For Carrefour, it’s a sensible transaction,” said Chris Hogbin, an analyst at Sanford C. Bernstein who has a “neutral” recommendation on the stock. “What they give up is some control over their strategy.” Hogbin estimates that Carrefour would effectively be paying 2 billion euros in equity.

Carrefour’s stock tumbled on June 17 after the company said that first-half results in France were below management expectations, marking the third profit revision since November. Chief Executive Officer Lars Olofsson said last week that he would look at all options to strengthen the company’s position in markets such as Brazil, China and Indonesia.

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