Exito’s $1.8 Billion Grocery Deal Bets on Brazil Turnaround

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The buyer of Brazil’s largest grocery chain says that while the country is mired in recession, it’s on track for a recovery within two years and will be back to driving growth throughout Latin America.

Medellin, Colombia-based Almacenes Exito SA agreed last month to a $1.8 billion deal to buy stores in Brazil and Argentina from its French parent, Casino Guichard-Perrachon SA. In an interview, Exito’s Chief Executive Officer Carlos Mario Giraldo said the expanded company would benefit from higher sales when Brazil turns around.

“No one should forget that over the past 10 years, Brazil has been the region’s biggest motor, and it will be again because it has solid fundamentals,” Giraldo said in Bogota. “We see a difficult 2015, a stabilization at a weaker base in 2016 and the possibility of a big improvement in 2017.”

Giraldo is defending the transaction after shares dropped 11 percent since the announcement. The stock climbed 1.5 percent to 20,200 pesos Wednesday as of noon in Bogota.

Under the terms, Exito would acquire Argentina’s Libertad grocery chain and half of Casino’s stake in Brazil’s Cia. Brasileira de Distribuicao. The deal would give Exito a total of more than 2,500 stores, making it the market leader in Brazil, Colombia and Uruguay as well as offering opportunities to cut costs and boost revenue, according to the company.

Saint-Etienne, France-based Casino, which bought control of the Colombian retailer in 2007, plans to group its operations in Latin America under Exito, raising corporate governance concern.

‘Strategic Rationale’

“We are still not convinced that this transaction was in the best interests of Exito’s minority shareholders, and we question the strategic rationale and financial synergies associated with the purchase of assets from the parent company,” Joaquin Ley, an analyst at Itau BBA, said in an Aug. 4 research report.

Giraldo said the deal was more attractive than other potential acquisitions in Latin America and was approved by the independent members of Exito’s board.

“The big targets in the region were positioned in second, third or fourth place, so the only accessible target that was a market leader in an important country was this,” he said. “What I see is a Colombian company that already bought what it could in Colombia, had the cash flow to grow in retail and real estate there, and is using its debt capacity to enter into markets with very powerful opportunities.”

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