Drugstore Billionaire Open to CVS Partnership: Corporate Brazil

Empreendimentos Pague Menos SA, Brazil’s second-biggest drugstore company, would consider U.S. partners such as CVS Caremark Corp. and Walgreen Co. to expand amid heightened competition, its chief executive officer said.

“We’ve been approached by some companies, but we would only do it with a strategic partner,” Francisco Deusmar de Queiros, 66, the billionaire CEO of the closely held chain, said in an interview at Bloomberg’s Sao Paulo office without naming any prospects. “The right partner has yet to appear -- the right partner that enchants us to go to the ball and dance.”

Pague Menos is falling behind as drugstore operators such as Raia Drogasil SA and Brasil Pharma SA acquire or combine with rivals. Regulatory approval of the merger of Drogaria Sao Paulo SA and Drogarias Pacheco SA would drop Fortaleza, Brazil-based Pague Menos and its 634 stores into third place in the industry.

A growing workforce with disposable income and an expanding elderly population are driving tie-ups and attracting foreign companies such as CVS, which bought Drogaria Onofre Ltda. this year. The country’s 68,000 pharmacies are expected to sell 54 billion reais ($24.8 billion) in drugs in 2013, said Sergio Mena Barreto, president of Abrafarma, Brazil’s drugstore trade group.

Drug sales are projected to grow about 10 percent a year through 2020, Mena Barreto said. Beauty and health-related products are rising, too, jumping at an 18 percent rate in 2013’s first eight months, he said.

Local Partner?

Queiros said Pague Menos’s need for funding to expand would spur him to consider potential tie-ups with U.S. companies. For any outsiders interested in Latin America’s largest economy, a local partner would be pivotal, according to Andre Parize, head of research at Votorantim Corretora SA.

“The Brazilian market is very competitive, not just in relation to the cost of money,” Parize said in a telephone interview from Sao Paulo. “It also requires knowledge of the complexity of the tax regime -- that’s the main barrier.”

With CVS’s February purchase of Onofre, which had 44 stores as of the second quarter, the U.S. company is testing the waters in Brazil, Parize said. Woonsocket, Rhode Island-based CVS, whose 7,500 stores dwarf that total, declined to discuss any specifics regarding Brazil.

CVS, Walgreen

“We continue to see Brazil as a very attractive market for us, but as a matter of policy we do not comment on market rumors,” Carolyn Castel, CVS’s vice president of corporate communications, said by e-mail.

Walgreen, also cited as a possible entrant into Brazil, is “positioned for international expansion” with partnerships outside the U.S. and otherwise has no specific plans now, Michael Polzin, a spokesman for the Deerfield, Illinois-based company, said in an e-mail response to questions.

Brazil’s first drugstore-merger wave occurred in 2011, led by Drogasil SA and Raia SA, which created Brazil’s largest pharmacy company.

The next combination may be between Brasil Pharma, controlled by billionaire Andre Esteves’s Grupo BTG Pactual, and Profarma Distribuidora de Produtos Farmaceuticos SA, according to Pedro Zabeu, an analyst at Fator Corretora in Sao Paulo. The companies declined to comment.

On Sept. 30, Ultrapar Participacoes SA, owner of Ipiranga gasoline stations, agreed to buy Imifarma Produtos Farmaceuticos e Cosmeticos SA, which operates under the brand name Extrafarma, in its first foray into pharmacies.

Margin Pressure

“Ultrapar is yet another big player with a lot of money to expand and that will only increase the movement of consolidation and stealing of market share,” Zabeu said in a telephone interview. “This could result in pressure of competition among big companies, and could end up with compression of margins.”

Ultrapar, based in Sao Paulo, declined to comment.

Pague Menos’s Queiros said Ultrapar’s entry is more significant for the industry than CVS or Walgreen would be because the Brazilian company knows where to open stores and how to operate in the country.

“Walgreen and CVS just have money,” he said in an Oct. 7 interview. “They don’t know Brazil. Ultra, for us, is a much stronger player than the giants of the world.”

During the next four years, Pague Menos plans to grow organically to 1,000 stores, investing 400 million reais in real estate and the same amount in stores. After citing market conditions in putting off an initial public offering in 2012, Queiros said he intends to try again for an IPO in 2014 or 2015.

“I won’t sell my company cheap,” he said. Queiros is worth at least $2.4 billion, according to data compiled by Bloomberg.

2013 Sales

Revenue this year is estimated at 3.8 billion reais, about 17 percent more than in 2012, Queiros said. Pague Menos’s profit fell 1.6 percent to 107 million reais last year, according to a financial statement on the company’s website. The CEO said 2013 earnings are expected to rise to 120 million reais.

Raia Drogasil, which has about 900 stores, reported second-quarter sales of 1.54 billion reais, a 16 percent increase from a year earlier. That compares with gains of 1.7 percent to $31.2 billion for CVS and 5.1 percent to $17.9 billion at Walgreen in their most recent quarter.

Pague Menos’s annual growth averaged about 23 percent during the past 12 years, and should fall to a range of 18 percent to 20 percent unless the company expands via a merger or acquisition, Queiros said.

All of Brazil’s drugstore operators are under pressure from increasing costs, said Parize, the Votorantim Corretora research chief.

Rent Drag

“Rent and a large number of employees have become onerous for the companies,” he said. “Synergies have yet to be seen.”

Shares of Sao Paulo-based Raia Drogasil fell 26 percent this year through yesterday, compared to an 8.1 percent decline in the benchmark Ibovespa index. Brasil Pharma tumbled 40 percent, while Profarma climbed 22 percent.

Zabeu, the Fator Corretora analyst, said drugstores remain an attractive investment as Brazil’s population gets older. A government census projected that the number of Brazilians age 65 and over would rise almost fourfold to 58.4 million by 2060.

“In general I really like the pharma sector despite having significant challenges,” Zabeu said. “The main point of the sector is it’s benefiting strongly from increment of demand of an aging population, which should see strong growth through 2025.”

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