By Amy Guthrie
MEXICO CITY--Mexican retailer Organizacion Soriana SAB reached
an agreement to buy 160 stores from Controladora Comercial Mexicana
SAB for 39 billion pesos ($2.6 billion), bolstering its position as
the country's second-largest retail chain behind Wal-Mart de Mexico
SAB.
The purchase will boost Soriana's share of the Mexican
retail-chain market to 22% from around 14% currently, versus more
than 50% for Wal-Mart, according to estimates from Soriana and
investment banks. Small stores and traditional markets are also
very active in Mexican grocery sales.
"Our main [chain] competitor remains much bigger than us. That's
one reason for the acquisition, to get closer to them," Soriana
Chief Executive Ricardo Martín Bringas said on a conference call
Thursday. "Better and more balanced competition will benefit all
Mexicans."
The agreement with Comercial Mexicana includes the acquisition
of 118 fully owned stores and the lease for 42 others from a third
party, raising its store count to 834. The deal also includes
inventory, three distribution centers and other assets, such as the
rights to use Comercial Mexicana's popular "Julio Regalado" summer
marketing campaign.
The acquisition strengthens Soriana's presence in central
Mexico, especially in and around the Mexican capital. Currently,
most of Soriana's selling space is concentrated in northern Mexico,
where the retailer is based.
Mr. Martín Bringas said the company will initially finance the
purchase through debt, including a syndicated bank loan and bond
issuances, while aiming to pay off that debt within four years.
Soriana will stick to its plan to spend roughly $143 million this
year on capital expenditures, while channeling cash flow from the
acquired Comerci stores into paying off the purchase.
Soriana is also considering an equity sale that would raise up
to $600 million to help pay down the acquisition, and it expects to
sell more than $100 million in nonstrategic assets such as
undeveloped land. The Comercial Mexicana acquisition, which
requires regulatory and other approvals, is seen increasing
Soriana's annual sales by about 37%, to nearly $10 billion.
Comercial Mexicana opted to keep 40 mostly high-end grocery
stores, said Mr. Martín Bringas, although Soriana would have liked
to acquire the entire company. Those upscale formats will continue
to be run by Comercial Mexicana's existing management team.
While noting the strategic importance of the deal for Soriana,
analysts expressed concern that the retailer will now lack cash to
invest in service improvements at its stores, which have been
struggling to increase sales. For competitors, "we think this will
open a window to grab market share," Credit Suisse said in a
note.
Mr. Martín Bringas dismissed those concerns Thursday, saying
that the Comercial Mexicana assets Soriana is purchasing were
well-maintained and thus are in need of little investment in the
near-term. He also characterized the purchase as much more
manageable than Soriana's most-recent acquisition, a 2007 deal that
roughly doubled Soriana's store count after the company purchased
retailer Gigante.
The Gigante purchase--combined with the global economic
crisis--pressured Soriana's profit margins in subsequent years.
Also, Soriana was unable to hold on to the market share gains that
deal provided.
"We are better prepared than ever to execute and capitalize on
this transaction," Mr. Martín Bringas said Thursday, predicting
double-digit earnings per share within two years of the Comercial
Mexicana deal's closing date.
Soriana shares were down 3%, to 36.15 pesos ($2.46), in midday
trade, outpacing a 0.8% decline in the broader IPC index of
Mexico's most-traded shares. Comercial Mexicana shares were faring
worse, down 5.8%, to 46.30 pesos, as investors questioned whether
the remaining Comercial Mexicana assets will yield results for the
soon-to-be smaller company.
Soriana said it is paying 36.09 pesos per share for the assets
it is acquiring from Comercial Mexicana, for a valuation of
11.8-times Ebitda.
Anthony Harrup contributed to this article.
Write to Amy Guthrie at amy.guthrie@wsj.com
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