CP ALL

CP ALL Plc (CPALL)

CPALL’s proposed acquisition of MAKRO is monumental, as it will create the most comprehensive Thai consumer proxy with dual leaderships in the retail and wholesale distribution channels. Bargaining-power reinforcement and logistics synergy make this a win-win proposition. A canny LBO deal structure enables value creation for CPALL despite a high acquisition price. Based on our preliminary calculation, CPALL’s DCF NAV would increase from Bt50/share to Bt58/share if this deal goes through.

Dual leaderships in Thai retail and wholesale distribution channels. CPALL has signed a share-purchase agreement to acquire a 64.35% stake in MAKRO at Bt787/share from SHV Holdings. This would effectively create the most comprehensive consumer proxy in the Thai stock market with the biggest retailer plus wholesaler. The deal is subject at least 75% shareholders approval at an EGM scheduled on 12th June 2013. If approved, the acquisition will take effect and subsequently triggering a mandatory tender offer (25 business days) for the remaining MAKRO shares in the market at the same purchase price. The transaction size is Bt189bn, majority of which is planned to be funded by debt (already secured) and the balance with cash on hand.

Bargaining-power reinforcement and logistics synergy. From an operational perspective, we see two potential benefits from this acquisition: 1) bargaining-power reinforcement and 2) logistics synergy. Based on 2012 financials, CPALL and MAKRO had combined sales and cost of goods sold of Bt301bn and Bt243bn, respectively, which is the largest among Thai retailers. We note that BIGC’s gross margin rose 161bps in the first year (2011) of its acquisition of Carrefour. It is also conceivable for CPALL and MAKRO to derive logistics synergy over time given that one runs a retailing platform and another wholesaling. In some respect, MAKRO’s outlets are virtually distribution centers for the mom & pop retailers.

LBO enables value creation despite high acquisition price. Undoubtedly, the proposed acquisition price for MAKRO is far from cheap. However, with this deal being structured as a leverage buyout (LBO), the cost of capital is significantly lower, hence allowing for value creation for CPALL. We believe CPALL manages to secure such massive financing because CPALL and MAKRO have well-established track records as market leaders in their respective segments and net cash balance sheet. In addition, the acquisition target exhibits remarkably low business risk (MAKRO’s earnings never had a drop in the past 10 years, despite witness the global financial crisis, political unrest and severe flooding)

Post-acquisition earnings and valuation impact. We are currently forecasting CPALL net profit to grow 26%, 21% and 20% in 2013, 2014 and 2015 respectively. On our preliminary post-acquisition forecasts, CPALL’s earnings growth will lower at 15% in 2013 but higher at 24% in 2014 and 40% in 2015. Meanwhile, our end-2013 DCF NAV estimate will increase from Bt50/share to Bt58/share. We note that our estimated earnings impact for CPALL is lower than that of MAKRO because: 1) MAKRO margins are lower, thus its earnings are much more sensitive to changes in margin assumption and 2) CPALL has to bear the debt burden from the acquisition.