O’Key Would Be ‘Potentially Attractive’ to Wal-Mart: CEO
O’Key Group SA (OKEY)’s chief executive officer said the 85-store Russian hypermarket chain would make a good fit for Wal-Mart Stores Inc. (WMT) should the world’s largest retailer revive its interest in the country.
“We are a potentially attractive acquisition target for Wal-Mart,” CEO Patrick Longuet said in an interview in a Moscow hotel, while adding that O’Key’s controlling shareholders don’t plan to sell because the business has high growth potential.
Wal-Mart has previously shown interest in the Russian retail market, which grew by 5.9 percent to 21.3 trillion rubles ($648 billion) in 2012. The Bentonville, Arkansas-based company was beaten to the acquisition of discounter Kopeyka by X5 Retail Group NV in 2010 and later closed its Moscow office after saying disagreements on price thwarted acquisitions. Spokesman Kevin Gardner declined to comment on Longuet’s remarks via e-mail.
“Being smaller than Russia’s top five retailers, O’Key is probably seeking to team up with an experienced larger player to keep growing at a fast pace,” said Natalya Kolupaeva, an analyst at ZAO Raiffeisenbank in Moscow. “Wal-Mart may be still interested in the Russian market as it offers growth, while U.S. retail is stagnating.”
An international retailer wanting to enter the Russian market would find it difficult to do from scratch, said Longuet, who joined the Luxembourg-based retailer from France’s Groupe Auchan in March 2007. “It will need to buy local chains.”
Auchan and Metro AG (MEO) are the only non-Russian retailers present among the country’s top 10 food retailers, ranking third and fourth, respectively, behind X5 and OAO Magnit. (MGNT) O’Key ranks at number six, behind OAO Dixy Group.
X5’s former CEO Lev Khasis is leading Wal-Mart’s efforts to introduce new store formats in overseas markets, a position he was appointed to at the beginning of this year.
Billionaires Dmitry Korzhev and Dmitry Troitsky own about 54 percent of O’Key, which they founded in 2001 and whose market value has risen 54 percent to $3.1 billion in the past year. The stock rose 0.9 percent to $11.50 at 8:46 a.m. in London trading.
O’Key spokesman Artem Gluschenko declined to provide contact information for Korzhev and Troitsky.
The retailer plans to spend 50 billion rubles to double its selling space to about 800,000 square meters (8.6 million square feet) by the end of 2015 and has a goal to double revenue by 2016, Longuet said. Sales last year were about $3.8 billion.
About two-thirds of O’Key’s stores are hypermarkets -- the company opened its 54th in April -- providing a strong presence in the most under-penetrated part of the industry, Longuet said.
Retailers including billionaire Sergey Galitskiy’s Magnit, TPG Capital-backed Lenta LLC, Auchan and Metro are expanding their hypermarket businesses in Russia. The country had 730 of the large-format outlets at the beginning of this year and that number may increase to 1,200 by the end of 2015, according to St. Peterburg-based researcher INFOLine.
O’Key looked at Metro’s Real stores in Russia last year, though was deterred because the German retailer wanted to sell them with the rest of Real’s eastern European stores, Longuet said. Auchan bought the outlets in Poland, Romania, Russia and Ukraine for 1.1 billion euros ($1.5 billion).
About 70 percent of O’Key’s investment over the next three years will be spent on building hypermarkets, the CEO said. The rest will go on a new format of discount stores, a chain of express supermarkets and store maintenance, he said.
O’Key, which has a third of its hypermarkets in St. Petersburg, decided to develop a new smaller store concept in the higher-income Moscow region, where planning regulations and a greater density of population leaves less land to build hypermarkets. The first stores will open by the end of 2014 once the grocer finds locations and builds a warehouse, Longuet said.
O’Key is targeting same-store sales growth of 6 percent to 7 percent a year, led by inflation and supported by an increase of about 1 percent a year in shopper numbers, the CEO said.
The retailer’s growth aspirations should be treated “with caution as the company has a track-record of missing its own growth targets and delaying store openings,” said Kolupaeva, the Raiffeisenbank analyst. “Lenta is rolling out new hypermarkets at a faster pace and would probably be more favored by investors once it holds an IPO.”
Lenta selected five banks to manage a possible initial public offering, two people familiar with the matter said this month. Lenta may be worth more than O’Key at about $5 billion as it owns a higher portion of its stores as opposed to renting them, according to UralSib Capital.
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