X5 to buy Kopeyka
The move will be financed through long-term facilities with Sberbank, including existing and a new credit line. It is expected to be completed in early December with a cash payment for 100% of Kopeyka’s equity and the assumption of no more than 16.5 billion roubles of net debt.
Ekaterina Andreyanova, analyst Rye, Man & Gor Securities, says the timing of the X5 move has increased the price.
“Rumors that Kopeyka could be acquired by giant retailer, WalMart, strengthened and boosted Kopeyka’s value. Looking back to its 2009 results the company’s EBITDA margin was 6.5 – a good result for retail. Leading retailers have greater a EBITDA margin but assuming a positive M&A deal with X5 it can add up quickly.”
Victoria Sokolova from Troika Dialog says the price is quite reasonable, and notes there will be synergies over the longer term.
“This is what the retail business is valued at, in terms of the public retailers. We are talking about just over 11 times EBITDA for 2010. X5 will be able to maintain its market share for the next several years, going forward, in terms of the number of stores and the square metres. And secondly they can cut significantly the administrative expenses of Kopeyka. And thirdly of course, its logistics and the buying power. They will be able to buy on a much greater scale. Well we estimate, in terms of valuation only, that the impact will be not that great at present. We think it’s about $1 per share. But, going forward, I think, the synergies may be much greater, depending on how they decide to restructure the business, how they decide to manage the franchising operation.”
Kopeyka operates discounter stores in the European part of Russia, with more than 50% of its 660 stores in Moscow and the Moscow region. Lev Khasis CEO of X5 Retail Group said the buyout of Kopeyka would reinforce its number one position in the Russian retail market with a substantial increase in scale
“X5’s multi-format growth has been led by soft discounters’ success in winning customers and delivering industry-beating like-for-like sales performance. Acquiring Kopeyka reinforces X5’s number one position in the Russian retail market, significantly expanding our soft discounter presence in Moscow and Moscow region. Kopeyka is a strong retail operator with good store locations, infrastructure and qualified personnel. We have identified significant opportunities for growing sales densities of acquired stores and improving efficiency to support margins.Economies of scale and integration of the Kopeyka asset base will further increase X5’s operating leverage in purchasing, distribution and other areas. With strong management at different levels and advanced infrastructure and technologies, Kopeyka also contributes expertise and capacity to support X5’s growth.Finally, the acquisition of Kopeyka will enable X5 to deliver even better value for Russian consumers. We will provide the lowest prices on the market for an increased number of lower income customers, while upgrading assortment in fresh produce and other items and stepping up expansion of discounters to reach more consumers underserved by the competition.”
Andrei Gusev, X5’s M&A and Business Development Director said that both companies benefit from the deal and this expands business possibilities and supports pipeline projects, increasing the company’s attractiveness.
“The Kopeyka team, to their credit, have built a great business and we are delighted they have chosen X5 as a partner. This is an attractive deal that meets our financial objectives is supposed to generate significant value for X5’s shareholders. Synergies will ramp up as we integrate Kopeyka over the next two years, and the acquisition will be substantially accretive afterwards. The quality of Kopeyka’s assets was underlined by serious interest from international players, while transaction valuation is in line with recent IPO activity in the Russian retail sector.”
X5 has stepped up its store expansion plans in discounters in 2010, and this will continue to be a major priority for driving organic growth in 2011. X5 will convert Kopeyka stores to Pyaterochka. The timetable will focus mainly on back-end operational and systems integration in 2011, with most store conversions taking place in the second half of 2011 and full-year 2012.