German retailing giant Metro on Thursday agreed to buy Singapore-headquartered Classic Fine Foods from private equity firm EQT for an enterprise value of $290 million following an auction process as interest in Asia's retail sector remains keen.
The Dusseldorf-based retailer could pay a further $38 million depending on whether Classic Fine Food achieves certain pre-tax earnings targets from 2015 to 2017.
The acquisition will enable Metro to move up the food chain, enabling it to capitalise on rising demand for gourmet products in Asia. The company has partnerships with suppliers to distribute products including Illy coffee and Valrhona chocolate.
"I think it’s a good deal for Metro because [demand for] fine foods and specialty foods is growing in Asia," Torsten Stocker, a Hong Kong-based partner with consultancy AT Kearney's consumer retail practice, told FinanceAsia, adding that Classic Fine Foods sells higher margin products compared to Metro's traditional cash and carry business.
Classic Fine Foods sources premium products mainly from France and distributes them to high-end restaurants and four- and five-star hotels in Asia and the Middle East. It employs about 800 people and generates annual sales of more than $200 million. The company did not disclose profit numbers.
Flush with cash
According to a source familiar with the deal, Metro has cash following the sale of its Galeria Kaufhof department store chain to Canadian retailer Hudson Bay for about €2.8 billion ($3.1 billion) in June and will be funding the acquisition through internal resources.
The German retailer has exited businesses elsewhere in the region, most recently selling its cash and carry business in Vietnam for an enterprise value of €655 million ($876 million) to Berli Jucker, a Thai company controlled by tycoon Charoen Sirivadhanabhakdi. A source at that time said Metro was not looking to sell the Vietnam asset but was motivated by Berli Juckers' compelling offer.
Classic Fine Foods' geographical footprint covers 25 predominantly Asian cities including Singapore, Dubai, Hong Kong, Bangkok, Kuala Lumpur, Ho Chi Minh City and Jakarta and the acquisition will increase Metro Cash & Carry's presence from 26 to 36 countries.
Metro also plans to expand Classic Fine Foods to selected European markets. It already has a presence in London.
"We have already successfully established our own food services distribution activities in markets such as China, Germany and Russia," said Olaf Koch, Metro's chairman, in a release. "By expanding the business activities of Classic Fine Foods to selected European Metro Cash & Carry markets we better tap the food services distribution growth potential in those markets," he added.
Barclays advised Metro and boutique firm Rippledot advised the seller.
Trickle of assets
There has been keen interest in Southeast Asia's retail sector but a scarcity of assets up for sale. This could start to change however as economic headwinds within Southeast Asian countries make owners more willing to sell at realistic prices.
"There is a strong trend of deals in the consumer space in the region as consumer spending is a large contributor to GDP in Southeast Asian countries and it benefits from the rising middle class," said the source familiar with the deal. "With the headwinds, some sellers' expectations could be revised slightly downwards which could be a good catalyst for deals," he added.
The problems European retailers face within their home markets is also spurring asset sales in Asia. For example, US retailer Tesco's is looking to sell its South Korean business Homeplus which could fetch in excess of $6 billion. HSBC is advising Tesco on the sale.
So far this year, according to data provider Dealogic, Asia consumer and retail targeted inbound cross-border M&A has fallen to $6.7 billion compared to $23.1 billion for the same period last year. Asia outbound M&A targeting the sector stands at $10.2 billion year-to-date compared to $38.3 billion last year.