Research Notes
Carrefour to acquire Seventh Continent?
| 19.05.09 |
In late April, Kommersant newspaper reported that Carrefour had signed a tentative agreement with the key owner of Russian retail chain Seventh Continent, Alexander Zanadvorov. According to the agreement, Carrefour was to purchase about 75% of the retail chain's shares, as well as a 95% stake in MCapital, which owns Seventh Continent's retail property.
At the moment, the likeliness of the deal is still doubtful, and the transaction cost has yet to be determined. Zanadvorov's share packages were preliminary valued at USD 1.25 billion, but this amount was disputed by Seventh Continent minority shareholders, including one of the company’s founders, Vladimir Gruzdev. Carrefour planned to make its final proposal on 15th May, after the assets have been valued.
In our opinion, the estimated cost of Alexander Zanadvorov's share package in Seventh Continent should not exceed its real market value in current conditions, given the relatively high market multiples at the retail chain's peer companies and Seventh Continent's weak operating results in the past two years.
- Seventh Continent’s market cap has surged more than 60% since the beginning of the tear on rumors about the possible interest in the company from strategic investors. The retail chain's current market cap seems to us a bit overstated: in our opinion, it does not fit the real dynamics of the retail network's sales, given its huge debt and falling business margins.
- Based on the current market cap, Seventh Continent shares are traded with a 2009 EV/EBITDA of 10,5, which is significantly above the same average indicator for other Russian food retail companies (7,0) and peers from developed and developing countries.
- Given Carrefour’s possible willingness to develop a retail network in Russia under its native brand, the transaction cost will be mainly based on the value of Seventh Continent’s retail property, owned by MCapital. At the moment, MCapital controls about 175,000 square meters of commercial retail property in Moscow.
- There is strong chance that the deal will be finally struck, as Alexander Zanadvorov has been forced to sell his share package in Seventh Continent because of a USD 560 million margin call from Deutsche Bank.
In view of Seventh Continent's fundamental indicators, the company’s stock value currently seems overstated. However, we do not rule out certain speculation driven interest in the company’s securities on rumors about Carrefour's recent proposals. As there is still uncertainty over the likeliness of the deal and the transaction price, we recommend that investors SELL Seventh Continent’s shares, since the retailer's capitalization has surged 60% since early 2009.
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Sectors: Consumer, RetailingCompany: The Seventh Continent