Berli Jucker
First take on acquisition of Metro Vietnam
Berli Jucker Plc (BJC)
What’s new?
BJC announced that it has signed a Sale and Purchase Agreement with Metro AG of Germany to acquire its Metro Cash & Carry Vietnam Ltd (Metro Vietnam) for €655m (Bt28bn). The firm will hold an EGM were the deal will be tabled. Assuming that shareholders approve, the transaction should be closed in 1H15.
Metro Vietnam is the only cash&carry operator in Vietnam. It has 19 wholesale stores that in 2013 generated sales of Bt21bn, ranking it as number two in that country’s modern-trade grocery market with a 22% share.
Metro AG will continue to support Metro Vietnam in various manners under a Transitional Services Agreement for a period lasting up to 24 months after the takeover. BJC intends to eventually replace the Metro Vietnam brand.
Medium-term pain; long-term gains open to question
Although Metro Vietnam presents an opportunity for BJC to build a retail empire and extend its supply chain in this high-growth country, it entails a substantial burden during the medium-term.
First, the business is a loss maker. Metro Vietnam has posted losses since it was established in 2002 and is likely to continue to do so for some years. We don’t think that BJC—which doesn’t have any expertise in this area—can turn the business around in a short period. The acquisition, thus, will boost revenue, but will squeeze the bottom-line.
Second, high interest expenses on the bridging loans of Bt28bn will weigh heavily on BJC’s earnings. There could also be FX risk if the firm declined to (or couldn’t) fully hedge its positions.
Third, the loan will push up BJC’s net gearing to 2.4x, increasing the risk of a cash call being necessary.
Over the long-term, we expect Metro Vietnam to face greater competition from existing players (BigC in particular) and from new entrants, such as MAKRO, which also intends to set a footprint in Vietnam soon.
Recommendation
The acquisition may result in an earnings forecast downgrade. We should be able to gauge the magnitude of the cut after the analyst meeting this afternoon. Even in the absence of the Metro deal, BJC is very expensive—PERs of 41.8x for FY14 and 34.5x for FY15—which flags it as a strong SELL. Our YE14 target price is Bt42.
