Eldorado M.Video merger talk sets sector buzzing

A major electronic goods retailer could be formed in Russia
Czech Group PPF, which now owns the Russian electronics chain Eldorado, wants to merge it with fellow whitegoods and electronics retailer M.Video, and to become the controlling shareholder in the merged company, according to a Tuesday Vedomosti report.

Anton Panteleev, PR manager at M.Video, told Business RT a merger reflected the Company’s vision of market trends.

“Given the current market situation we, as a Company, think that the merger would favorable for the market as a whole.”

Panteleev noted, however, that there hasn’t been an official proposal from PPF, with the Vedomosti report adding that the Federal Antimonopoly Service had not received a request to consider an Eldorado-M.Video merger, but that if it did it would consider it "in the framework of the law, which sets a threshold of 35% for market domination."

Maria Shishkina, analyst Russ-Invest, says the news of potential talks had generated some market reaction with M.Video shares outperforming the market on Tuesday.She says the prospect of a merged Eldorado and M.Video is the creation of an industry giant, which may not be good for consumers.

“If the parties agree, then the market will get the biggest electronics retailer with 40% of the market, and only Media Markt, with its 7% share, will be able to create competition to the new leader. From the point of view of consumers the news is certainly not comforting – as we know, the absence of competition can drive goods prices up as well as lead to the situation where a monopolist can dictate his terms in the market. On the other hand, anti monopoly legislation stipulates the dominance boundary of 35%, that’s why it’s not impossible that M.Video might offer part of its stores to other market players, for example, Media Markt or Tehnosila. As for the advantages for M.Video, they are obvious – leadership in the market and the increased number of stores, which is quite in line with its policy of aggressive expansion – Eldorado had 330 of its own stores as of June 2011 ,M. Video – 232. And for the deal M.Video can issue additional shares, which can increase their liquidity.”

Investcafe analyst, Anton Safonov, says M.Video, being a public company, would benefit much more from the deal, as its expansion should increase capitalization. He added that the final outcome of the deal will also depend on the way it will be structured.

“In my view, a complete purchase of Eldorado by M.Video is most likely. Probably, thh scheme will be a standard one for such cases – there will be additional share issue, and the deal will be in one part financed by shares, and in the other- by cash. Then the current shareholders of Eldorado will get their share in a joint company. Currently M.Video capitalization stands at 39.9 billion roubles, and Eldorado could be priced ataround 30 billion roubles. But for this M.Video will need to attract a significant amount of assets, which isn’t difficult given the absence of a debt load. Now the debt load has come close to 1 billion roubles and was at 951 million roubles in 1H, which was caused by short term credit. But already by the end of this year the debt will be paid,. Herewith I expect net retail revenues to exceed 110 billion roubles in 2011, but EBITDA margin will remain at last year’s level or around 5.2%. Even if around a half of the necessary sum is attracted in the form of credit resources, it’ll mean that the ratio NetDebt/EBITDA will be at around 2,6х, which is comfortable enough.”

Safonov also thinks M.Video will need to sell some stores to comply with the FAS requirements, adding revenues will go up significantly anyway.

“If the pace of growth of Eldorado revenues remains the same, the joint Company can account for more than a 70% revenues growth, and the number of stores will increase almost twofold and exceed 500.”

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