CP All gets green light to buy Siam Makro

CP All's roadshows pay off as 87% of investors support its $6.6 billion plan to acquire Siam Makro.

Convenience store operator CP All has received the green light to go ahead with its $6.6 billion acquisition of discount retailer Siam Makro — a deal with the highest valuation among retail sector acquisitions in Asian emerging markets during the past five years, according to analysts.

At a shareholder meeting on Wednesday, 87% of shareholders voted in favour of the acquisition, well above the 75% that CP All needed. CP All’s stock had initially plunged by as much as 10.3% to Bt38.5 immediately after the news of the acquisition on April 24. However, since then, the company embarked on a roadshow meeting with shareholders to rally support for the deal and its efforts have clearly paid off.

CP All has financing in place with seven banks — Bangkok Bank, HSBC, Standard Chartered, SMBC, Siam Commercial Bank, Krung Thai Bank and UBS extending a 12-month bridge loan of up to $6 billion. The loan size is spread equally among the seven banks and the all-in cost is below 5%, according to a source.

Siam Commercial Bank advised CP All on the acquisition and UBS advised the parent CP Group, according to a spokesman for the Swiss bank. HSBC advised SHV. Surprisingly, HSBC, which advised the seller SHV, is also a lender for CP All’s bridge loan.

CP All’s acquisition is expected to continue to generate more business for banks during the next few years. The one-year bridge loan will expire in August 2014 and analysts say the company is considering various options for the take-out, including loans, bonds or through spinning off Siam Makro’s properties into a property fund or real estate investment trust.

Dhanin Chearavanont, the chairman of CP Group, and private Dutch trading conglomerate SHV, have a long-established relationship, forged in the creation of Siam Makro in the late 1980s. However, the group suffered significantly from the baht’s devaluation during the Asian financial crisis due to substantial dollar loans. Under pressure, Chearavanont sold most of his stake in the discount retailer.

The reunion is not coming cheaply. CP All is paying more than 13 times the price CP Group sold it for in 2005 and a lofty 53 times Siam Makro’s 2012 earnings per share. CP All’s acquisition of Siam Makro is expected to move CP All from a positive net cash position to a debt-to-earnings level of more than six times, according to analysts.

One of the justifications provided by CP All’s management for the deal is that their 7-11 operations in Thailand are a franchise, not their own brand, and hence difficult to take abroad. Despite the expensive metrics, analysts also saw a rationale for the deal.

CP All’s move into big format stores through the purchase of Siam Makro is also seen as a defensive move as other hypermarket chain operators — such as Big C and Tesco Lotus — are pushing into its turf and opening smaller stores.

New entrants to the big store format, such as CP All, face challenges in unrolling a large number of stores quickly. This is necessary to achieve economies of scale and to be competitive. CP All is faced with a predicament: it is dominant in small format retail, but the big format retailers have erected such high barriers to entry that the only way to gain a foothold is by acquiring an existing player.

“The acquisition is clearly very expensive, based on multiples,” says Religare research director Vincent Fernando. “But primarily, it is an acquisition that is defensive in nature and it is something that addresses a long-term competitive problem.”


For our profile on CP Group, please check out to the upcoming issue of FinanceAsia magazine.

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