FRIDAY, March 29, 2024
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Berli Jucker

Berli Jucker

Metro deal is likely to flop HOLD

Berli Jucker Plc (BJC) 
Investment thesis
What’s new?
JayDee Partners Ltd, BJC’s independent financial advisor, reported to BJC’s shareholders that the pending purchase of Metro Vietnam under the additional conditions (the Supplemental Deed) relating to the payment of the purchase price—which are different from the conditions stated in the initial Sale and Purchase Agreement—entail major financial and legal risks. The IFA recommended that shareholders vote against the deal.
Under the additional conditions, BJC is not only required to deliver a letter of guarantee for 655m euros (required in order to get the relevant Vietnamese regulatory agency to amend the Investment Certificate), but must also transfer in advance 655m euros to the bank account of Metro Vietnam (capital account) as proof of purchase price payment to the Vietnamese regulatory agency. As such, the initial transaction totals 1,310m euros, which would require BJC to obtain additional debt financing.
The IFA also expressed concern over debt financing and money transfer risk tied to paying 655m euros into Metro Vietnam’s capital account in advance, given the uncertainty of obtaining an amended Investment Certificate and the uncertainty of the time-frame for the refund of the cash in the event that the deal doesn’t go through.
Moreover, the IFA pointed to litigation risk. According to BJC’s legal advisor, if shareholders were to approve the deal but BJC was unable to obtain sufficient financing to transact it, the firm would be exposed to litigation risk, tied mostly to its failure to perform its commitments under the Sale and Purchase Agreement.
The deal is likely to flop—positive in our view
Given the IFA’s opinion, BJC’s shareholders will probably veto the deal at the EGM slated for January 8. As such, BJC’s ambition of becoming a leading modern trade operator in Vietnam looks set to remain just an ambition for the moment. However, a NO vote would be positive in our view. Besides the IFA’s concerns, we believe that Metro Vietnam would be a big burden on the firm, as it would face: 1) dilution from a cash call, 2) interest expenses on loans used to fund the acquisition and 3) losses at Metro Vietnam for at least the next three years. We estimate that the effects of only dilution and interest expenses alone would cause EPS to be 60% below our current forecasts for FY15-16.
Still not a good time to take positions
Although we expect shareholders to vote NO to the deal, so removing intense downside risk from the bottom-line outlook, we still recommend against taking positions in BJC. The firm’s numbers are likely to remain weak for at least the next six months. And BJC’s FY15 PER is an expensive 29.5x, despite its weak 1H15 outlook. However, we have upgraded our rating from SELL to HOLD, due to the eased downside risk.
 
 
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