Alsea Diner Deal Poised for Starbucks Makeover: Corporate Mexico

Alsea SAB, the operator of Starbucks and Burger King chains in Mexico, is surging to a record as Credit Suisse Group AG and Citigroup Inc. predict its acquisition of Vips restaurants will help double profit by 2015.

The shares reached a record 47.29 pesos last week and have jumped 12 percent since March 14, when Credit Suisse called the Vips purchase a “strategic milestone” that will bring cost savings through greater scale. Mexico City-based Alsea agreed in September to buy Vips, which has 362 diner-style restaurants, from Wal-Mart de Mexico SAB for 8.2 billion pesos ($620 million). Citigroup’s Julio Zamora raised his price target on the shares to 52 pesos last week from 41.40 pesos, saying regulatory approval is likely.

Alsea, which also operates P.F. Chang’s and the Cheesecake Factory in Mexico, has fared better than other retailers this year partly by catering to affluent customers less affected by the economic slump that has sent consumer confidence to the lowest since 2010. The Vips deal brings Alsea real estate that may be converted to Starbucks or other formats, according to Credit Suisse.

“It’s a good growth story,” Aldo Miranda, a trader at Intercam Casa de Bolsa SA, said in a phone interview from Mexico City. Alsea targets a “a middle-class consumption sector that wasn’t as affected” by a slump in consumer spending as stores and restaurants catering to lower-income shoppers.

Same-Store Sales

The stock’s 14 percent surge this year contrasts with an 17 percent plunge in shares of billionaire Carlos Slim’s restaurant chain, Grupo Sanborns SAB. Wal-Mart de Mexico, Latin America’s largest retailer, has lost 10 percent. The benchmark Mexican IPC index is down 7 percent.

Sales at Alsea stores open at least 12 months jumped 8.3 percent in 2013. That compared with a 0.1 percent increase in stores and supermarkets tracked by Mexico’s retail association, Antad. The country’s economy grew 1.1 percent last year, less than a third of the pace in 2012.

Alsea, which has grown to nearly 2,000 locations throughout Latin America, is financing the Vips acquisition with bank loans. The company plans to raise as much as 5.35 billion pesos to pay off the acquisition debt, according to a stock exchange filing.

Antonio Gonzalez, an analyst at Credit Suisse, raised his 12-month target price on the stock to 55 pesos from 31 pesos, according to a March 14 note.

Overwhelming Menu

As many as 30 unprofitable Vips locations may be closed or converted, allowing for more openings of Starbucks, Chili’s or P.F. Chang’s restaurants, he wrote. Credit Suisse projects Alsea’s net income will jump to 1.38 billion pesos by 2015, from 681 million pesos last year, while Citigroup projects it will reach 1.71 billion pesos in the period.

Alsea has signaled it will revamp remaining Vips restaurants, according to Gonzalez. In the current incarnation, he wrote, the menu is “overwhelming,” with four pages for starters, eight for main courses and four for dessert -- and that’s just for lunch. There may also be enough spare room in some Vips restaurants to squeeze in a Starbucks counter, he wrote.

Citigroup’s Zamora assumes four Vips locations can be converted to other casual dining formats in 2014, according to a March 20 note.

“We like the business mix relative to other consumer plays in Mexico,” he wrote. Nine of 17 analysts rate Alsea a buy, with six holds and two sell recommendations.

Competition Ruling

Mexico’s competition commission has asked Alsea to eliminate exclusivity clauses in 54 rental contracts with shopping centers and disclose details of the agreements on its website, Alsea said March 5. The company said it expects to meet the conditions and close the transaction soon.

Gaspar Quijano, an analyst at Vector Casa de Bolsa SA, said in a phone interview from Mexico City that he has a hold recommendation on the stock partly because the Vips deal can’t come soon enough.

“It’s taking longer than anyone had suspected,” Quijano said.

Alsea was founded in 1990 as a franchiser of Domino’s Pizza Inc. The company held an initial public offering in 1999 and opened its first Starbucks and Burger King locations in 2002. Since then it has also added Italianni’s, California Pizza Kitchen and Pei Wei Mexico franchises.

The company said in a filing today that it would extend rights to Chili’s in Mexico through 2018, agreeing to operate at least 56 chains.

38-Peso Latte

Catering to a more affluent demographic helped Alsea increase profits by 87 percent last year. At Sanborns, profit rose 9 percent to 3.23 billion pesos.

Antonio Ocaranza, a press official for Wal-Mart de Mexico, didn’t immediately respond to an e-mail and phone call seeking comment on the Vips transaction or the company’s sales. A press official for Sanborns declined to comment on revenue.

Alsea press officials didn’t respond to an e-mail and phone call seeking comment. Alsea said in a filing with the Mexican stock exchange that it plans to “optimize the use of the real estate” in the Vips transaction and “restructure unprofitable units.”

Starbucks accounts for almost 20 percent of Alsea’s sales, compared with 5 percent in 2004, Credit Suisse estimated. Regular customers aren’t deterred by the 38 peso ($2.90) price for a small latte at the Starbucks next to the Mexican stock exchange in the capital.

“Young professionals like to have a free Internet connection and like to be outside” in Mexico’s warm and sunny weather, Vector’s Quijano said. “Starbucks has a wide-open section for connectivity, and climate helps. People like it.”

Before it's here, it's on the Bloomberg Terminal.