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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Madharry who wrote (43076)	6/22/2011 8:49:19 AM
From: Mr.Gogo	Read Replies (1) \| Respond to of 78614

Randolph McDuff May 27, 2011 Adding shares of Companhia Brasileira de Distribuicao (CBD, NYSE- $41.73) Speculation has been put forth in the investment media suggesting that Carrefour is interested in selling/merging their substantial retail business in Brazil to CBD. brazilglobal.net Shares of potential acquirers typically decline on news of mergers or purchases. The recent share price movement in CBD, down approximately 9.3% since May 2nd, is not inconsistent with takeover valuation movements. CBD is Brazil's largest grocer and electronics retailer. Until 2010, the firm grew organically. In 2010, a colossal acquisition took place. CBD merged with privately held Casas Bahias, Brazil's leading furniture and electronics retailer. The combined CBD/Casas Bahias now holds a commanding #1 market share in groceries, consumer electronics and appliances in Brazil. Carrefour, with roughly an 11% market share in grocery items, is a distant second. Wal-Mart remains in 3rd place, and has been unable to close the market share gap with Companhia Brasileira de Distribuicao. A merger with Carrefour and CBD could be WILDLY accretive to CBD in the medium term. Assuming that CBD were to complete such a merger, and assuming that Carrefour sells the Brazilian unit at roughly 11x EV/EBITDA, CBD would wind up issuing about 200 million shares in an exchange. Potential synergies could approximate $500 million US per annum, or potentially $1.06 per share within 36 months. More importantly, CBD would increase its footprint outside of the Sao Paulo area of Brazil (where it is the dominant grocer by far) and extend its strong advertising budget (CBD is Brazil's largest media buyer) to encompass the Carrefour units. blogs.ft.com A merged company would also increase CBD's global profile with institutional investors, mutual funds and ETF. A combined CBD and Carrefour Brazil could result in a business with a market cap of almost $20 billion. Companhia Brasileira de Distribuciao would be more than the first choice as a retailer within Brazil; it could easily be one of the top #3 picks globally among grocery retailers. Carrefour's longstanding history of poor management prevented the firm from effectively competing against Companhia Brasileira de Distribuicao. Accounting irregularities and massive inventory write-offs were taken at the Carrefour unit in Brazil in 2010. The write-downs occurred in almost every quarter during the fiscal 2010 year and have clearly brought Carrefour's French management to the breaking point. That said; Carrefour had made some rather significant capex over the last 3 years in Brazil. The store base is sizeable and relatively modern. At this juncture, and under the assumption that CBD is serious about adding the division, to purchase Carrefour after a balance sheet purge makes prudent fiscal sense. Bears are quick to suggest that should a merger would create monopolistic concerns with the Brazilian government. I hear such an argument, but don't concur with the conclusions inferred. Outside of the top 3 Brazilian chains, the grocery store industry is highly fragmented. New entrants from Chile are currently consolidating some of the smallest firms, and German retailers appear keenly interested in developing a presence in the industry. CBD also has the Wal-Mart fear card that it can use to trump any monopoly concerns ("we MUST be much larger than Wal-Mart or they will squash domestic competition"). Many in North America consider the Brazilian government to be left wing and somewhat meddlesome in domestic affairs. I would counter with a view that suggests Brazil models their domestic economy after that of China and Singapore; a form of structured capitalism whereby the nation is allowed to build domestic monopolies at the expense of foreign competition. The goal is to have a series of flagship businesses that are the best in class, and that are capable of competing against any on the planet. If my views are to be believed, then there should be no issues of a badly run foreign firm selling out to a very well managed domestic firm. RMG#1 will be adding more shares of CBD to the account to round out the portfolio position. Should the merger not take place, CBD still looks to be growing its business at the same brisk pace as in the past, and I consider the shares to be a fair value at current prices. In a merger of equals, I envision a rather significant acceleration of growth potential. Cost savings could free up sufficient capital of some consequence; a combined firm could be capable of outspending Wal-Mart Brazil by more than twofold on an annual basis and still strengthen the balance sheet.