CPALL

CPALL Plc

Positive momentum of SSS growth in 2Q13F. In 2Q13F, CPALL’s SSS growth will
continue strong after the good +11.8% YoY in 1Q13, with this year’s unusually hot
weather supporting food product sales (73% of total sales). In 2013, CPALL views
operations as on track with robust SSS growth and continued expansion of new stores
(already opened 219 new stores in 1Q13 vs its targeted 540 in 2013F).
More details on CPALL’s proposed acquisition of MAKRO
CPALL signed a share purchase agreement to acquire a 64.35% stake in MAKRO at
Bt787/share from SHV Holdings. This acquisition is subject to at least 75% approval
from shareholders at an EGM scheduled on June 12th. If approved, the acquisition
then triggers a mandatory tender offer (25 business days) for the remaining
MAKRO shares in the market. The total transaction size (acquisition + tender offer)
is Bt189bn, the majority of which is planned to be funded by debt (already secured
with seven banks) and the balance with cash on hand.
The rationale behind the purchase is multifaceted and includes: 1) a rare, if not
only, opportunity to acquire a top-tier asset with well-established leadership in
the cash & carry distribution format; 2) better economies of scale and operational
efficiency (joint distribution to improved lead time, reduction of opportunity loss
via inventory management, and potential for joint product initiatives);
3) opportunity to expand overseas via MAKRO’s brand and management’s
expertise; 4) utilizing its long-untapped leveraging capacity to increase return on
investment; and 5) unlocking the value of under-utilized land.
Post acquisition, CPALL expects business synergies from economies of scale and
better operational efficiency of at least 20bps in 2014F. It will speed up MAKRO’s
original planned store expansion to 7-11 stores in 2014-19F from 3-5 stores in
2009-12A; this includes both domestic and international expansion.
Strong support from seven leading financial institutions with favorable cost of
funds (below 5%) for its one-year bridge loan. CPALL is considering several options
to ‘take out’ the one-year bridge loan, including: 1) term loan with banks; 2) bond
issuance; and 3) monetizing real estate portfolio (e.g., property fund/REIT).
With continued operational improvement, CPALL expects its net debt/EBITDA to
come down to 3.0x in 2016F from 6.0x in 2013F.
CPALL reaffirms that it will continue to pay dividends as usual and will not raise
equity to fund the deal. Its focus will be on expansion and operational flexibility.
Maintain BUY. The crucial event for the stock at this point is the June 12 EGM. We
continue to believe this deal will be good for both parties, with potential for synergy
gains and operational improvements, while the LBO structure enables value creation
for CPALL. We will review our post-acquisition forecasts after MAKRO’s analyst
meeting scheduled on May 16th.