Thai 7-Eleven King Turns Retail Dream to Stock Nightmare

Billionaire Dhanin Chearavanont’s ambitions to create Southeast Asia’s largest retailer already wiped out $2.3 billion for CP All Pcl investors. Now, funding the industry’s most expensive bid may put more value at risk.

Dhanin’s CP All, which runs more than 6,800 7-Eleven stores in Thailand, slid 10 percent in Bangkok yesterday -- the most in more than four years -- after saying it will pay $6.6 billion for discount wholesaler Siam Makro Pcl. The offer is 41 percent above Siam Makro’s average price in the prior 20 days, a record premium for a retail deal in emerging Asia, according to data compiled by Bloomberg. CP All’s bid also represents the highest multiple to net income, the data show.

While Dhanin plans to squeeze suppliers for better terms and export Siam Makro’s membership-warehouse model across Asia, the limited increase to profits isn’t enough to justify the price, said Credit Suisse Group AG. Although the Bangkok-based company says it has no plans to sell new stock to fund the deal, CP All’s share price will be weighed down by concerns that it will eventually have no other option, said UOB Kay Hian Securities (Thailand) Pcl.

“CP All is going to have to do a cash call,” Alan Richardson, a Hong Kong-based fund manager who helps oversee about $110 billion for Samsung Asset Management Co., including Siam Makro shares, said in a phone interview. “The valuation doesn’t make sense. With this kind of emerging market, the potential is definitely there, but for a stock investor who looks on a time horizon of one to two years, it would be negative.”

Booming Economy

“It may be expensive for other buyers, but it is not for CP All,” Dhanin, 74, said yesterday during a shareholder meeting for Charoen Pokphand Foods Pcl, another company controlled by his Charoen Pokphand Group. “Thailand’s economy is booming. Tourism is also booming. This will boost demand for food at restaurants that are customers of Siam Makro.”

Dhanin later said that he doesn’t think CP All will have to sell shares to pay for the deal.

CP All gained 5.1 percent to 41 baht in Bangkok today. Siam Makro slipped 0.5 percent to 750 baht after rising 11 percent yesterday.

Created in 1988, CP All opened Thailand’s first 7-Eleven store the following year. By 2009, the convenience store network was the third largest of its type in the world, behind the U.S. and Japan. Each day in Thailand, about 8.3 million people -- 12 percent of the population -- visit CP All’s 6,822 7-Eleven stores, according to the company’s 2012 annual report.

‘Very Different’

Siam Makro, also based in Bangkok, runs 57 membership-based warehouse wholesale stores as well as five smaller frozen-food shops, according to its annual report.

Net income at Siam Makro, which counts grocery stores and small shops as well as hotels and restaurants among its customers, almost tripled to 3.56 billion baht ($123 million) in the five years through 2012, data compiled by Bloomberg show.

“The two are operating a very different business,” Best Waiyanont, an analyst at Macquarie Group Ltd. in Bangkok, said by phone. “We don’t expect a lot of synergy from this acquisition.”

CP All plans to acquire Siam Makro in two stages, first buying 64 percent from Utrecht, Netherlands-based SHV Holdings NV, and then making a tender offer for the shares owned by other stockholders, it said on April 23. At 188.9 billion baht, or 787 baht a share, the offer is 41 percent more than the 20-day average of Siam Makro’s shares before the deal was announced.

Highest Premium

Siam Makro’s shares rose 30 percent in the six trading sessions before the announcement. Thailand’s stock exchange will investigate the jump in share price and a surge in trading volume, its president Charamporn Jotikasthira said today.

The premium is higher than in any retail transaction valued at more than $300 million in emerging Asia, data compiled by Bloomberg show. CP All’s offer is 53 times the target’s 2012 earnings, also the highest among those deals.

The purchase price equates to more than $100 million for each Siam Makro store, including its frozen food shops, according to data compiled by Bloomberg. Costco Wholesale Corp., the largest membership-based wholesaler in the U.S., is valued at about $73 million per store. When Bangkok-based Big C Supercenter Pcl acquired Carrefour SA’s 42 stores in Thailand in 2011, it paid about $28 million for each outlet.

“I’m quite negative on this deal,” Padon Vannarat, an investment strategist at Bangkok-based Maybank Kim Eng Securities Pcl, said by phone. “Maybe they are looking for purchasing power, but it’s still expensive.”

Largest Retailer

After resuming trading yesterday, CP All shares fell 10 percent to 39 baht. Including a 6 percent drop on April 22, when Bloomberg News reported the takeover plans, almost $2.3 billion has been wiped off of the retailer’s market value, which stood at about $12 billion yesterday.

CP All and Siam Makro would have combined sales of $14 billion by the end of 2014, according to analysts’ estimates for each company compiled by Bloomberg. That will vault it past Singapore-based Dairy Farm International Holdings Ltd., the operator of 7-Eleven stores in Singapore, to rank as Southeast Asia’s largest retailer.

Government policies to help Thailand’s low-income population, including higher minimum wages and price guarantees for farmers, have flowed down to the family-run grocery stores that Siam Makro serves.

The takeover would also give CP All a way to expand overseas faster than it can with the 7-Eleven brand, which is limited by franchise agreements, Dhanin said yesterday.

Returns Threatened

CP All still has grown profit more than sevenfold to 11 billion baht in the five years to 2012, data compiled by Bloomberg show. Over the same period, the company’s return on equity jumped to 46 percent from 16 percent.

Buying Siam Makro will reduce the company’s return to 12 percent, Credit Suisse analysts in Hong Kong led by Karim P. Salamatian wrote in a note yesterday. Credit Suisse was one of at least four brokerages to cut its rating on CP All since the deal announcement.

“While the Makro asset is of high quality, the magnitude of deterioration in returns leads us to doubt whether this was the right price to pay,” Salamatian wrote.

To pay for the deal, CP All got a $6 billion bridge loan that will need to be refinanced within a year through syndicated finance, bonds and possibly equity, people with knowledge of the matter said this week.

Financing Need

Unless CP All -- previously debt-free -- raises fresh capital, the company’s annual interest expense may exceed 8 billion baht next year, Chalinee Congmuang, an analyst at Deutsche Bank in Bangkok, wrote in a note yesterday.

Siam Makro’s earnings may help limit the debt burden, said Andrew Yates, Bangkok-based head of international equity sales for Asia Plus Securities Pcl. CP All’s net income will rise 47 percent by the end of next year, while Siam Makro’s will gain 41 percent, analyst estimates compiled by Bloomberg show.

“In this booming Thai economy, the right strategy should be to expand with increased debt,” Yates wrote in an e-mail yesterday. “Makro is a profitable business and its cash flow more than offsets the debt charges.”

Still, given the size of its borrowings, CP All will have to sell shares to refinance the debt and reduce its costs, Thananchai Jittanoon, an analyst at UOB Kay Hian in Bangkok, said in a report yesterday.

The price “is hefty and hardly justifies such investment, and is expected to weigh down on CP All’s earnings and profitability,” Jittanoon wrote in the report.