Bloomberg News

Billionaires Team Up to Back Carrefour in Brazil Retail Deal

June 29, 2011

(Closes share prices in fifth paragraph.)

June 29 (Bloomberg) -- An alliance between two Brazilian billionaires and their nation’s government may help Carrefour SA fend off competition from Casino Guichard-Perrachon SA in the world’s second-biggest emerging market.

Andre Esteves, the 42-year-old chief executive officer of Banco BTG Pactual SA, and Cia. Brasileira de Distribuicao Grupo Pao de Acucar Chairman Abilio Diniz, 74, are proposing to merge Carrefour’s Brazil assets with the local retailer. The deal, backed by an injection of as much as 2 billion euros ($2.9 billion) from a Brazilian state bank, may prevail over a 2005 accord that would give Casino control of Pao de Acucar in 2012.

The deal allows Esteves’s BTG to increase its bet on a market where retail sales expand 10 percent a year. For Diniz, it’s a way to avoid relinquishing control of the company his father founded in 1948. The Brazilian government achieves a goal of creating national companies big enough to expand overseas.

“It’s an emblematic deal for Brazilian retail,” Daniela Bretthauer, head of consumer research for Latin America at Raymond James, said in a telephone interview from Sao Paulo. “It’s a unique chance to create a dominant player in the local market, with a market share around 35 percent.”

Pao de Acucar rose as much as 12 percent in Sao Paulo trading and reversed earlier gains to close 3.1 percent lower at 71.00 reais. Carrefour advanced 2.4 percent to 28.11 euros in Paris after climbing 3.7 percent yesterday. Casino gained 3.9 percent to 64.60 euros, paring yesterday’s 5.6 percent decline.

‘Illegal’ Transaction

Casino described the proposal as “hostile” and said the deal is a “long-standing illegal planned financial transaction,” according to an e-mailed statement yesterday.

Under the merger proposal, Esteves’s BTG is creating a new company, Gama, which would buy all Pao de Acucar shares and Carrefour’s Brazilian assets. Gama would become the biggest shareholder in Boulogne-Billancourt, France-based Carrefour with an 11.7 percent stake, and would initially get two seats on Carrefour’s board, according to a statement.

The combination would have 2011 revenue of more than 30 billion euros and generate 700 million euros in savings annually, Gama said. Brazil’s state development bank would have an 18 percent stake in the merged business while BTG would hold 3.2 percent, said Percio de Souza, a partner at Estater Gestao e Financas, which advised Pao de Acucar on the deal, at a press conference yesterday.

Emerging Middle Class

Much is at stake for Casino and Carrefour as they look to offset falling earnings at home by expanding into emerging markets. Casino, based in Saint-Etienne, France, gets a quarter of sales from Latin America. Brazil is the second-largest contributor to sales for Carrefour after France.

Brazil’s $1.6 trillion economy is the world’s No. 2 among developing nations after China, according to data compiled by Bloomberg. Developing nations will account for 93 percent of the global “middle class” by 2030, up from 56 percent in 2000, according to Citigroup Inc.

The proposal had been the object of “informal discussions” between Diniz, BTG partners and executives at Carrefour and Casino, as well as Blue Capital, a Carrefour shareholder, for the past two years, Souza said. Formal talks with BTG started about a month ago, according to Carlos Fonseca, head of BTG’s private-equity division.

Brazil’s state development bank BNDES, which lent $105.8 billion in the 12 months through April, said it’s backing Pao de Acucar’s “internationalization project.” If approved, the transaction will pave the way for greater penetration of Brazilian products in international markets, BNDES said.

National Champions

“This just confirms a trend that has been going on the last few years, of BNDES encouraging national champions to become more daring and to expand internationally,” said Marcello Hallake, a lawyer focused on Latin American mergers and acquisitions at Thompson & Knight LLP in New York.

With the BNDES financing of 85 percent of the deal, antitrust approval is likely, Bretthauer from Raymond James said. While Casino “has the right to be a little upset” for being left aside in the negotiations, the French retailer will also benefit from the deal, she said.

It’s the first time BNDES and BTG have worked together on a deal, though the investment bank had joined forces with the government before on another consumer sector bet. BTG on Jan. 31 acquired a controlling stake in Banco Panamericano SA, Brazil’s biggest lender for used cars, and entered into a partnership with Caixa Economica Federal, the state-controlled bank.

‘Good Opportunity’

Esteves said Panamericano opened a new line of business at BTG, which used to be a pure investment bank. The acquisition was part of a strategy to bet on companies that serve Brazil’s growing middle class, and a chance to become a partner of the financing agent for 80 percent of Brazil’s national housing system, he said on Feb. 21.

The fates of BTG and Pao de Acucar intersected in August last year, when the bank hired Claudio Galeazzi, who was the retailer’s CEO from December 2007 until March 2010. Galeazzi joined BTG’s private-equity division to help define strategies for the bank’s consumer ventures.

“We had been following the news involving Pao de Acucar and Carrefour and saw a good business opportunity in the combination of these two companies, considering our own experience, the knowledge Galeazzi has of the retail sector and our internal analyses,” Fonseca from BTG said at a press conference yesterday in Sao Paulo.

Bakery Beginnings

Pao de Acucar was started as a bakery in 1948 by Diniz’s father Valentim, a Portuguese immigrant. Diniz, the oldest of six kids, began working when he was 20, and bought control of the company from his siblings in 1992. Three years later, the company held an initial public offering.

In 1999, Casino bought 24 percent of the group’s voting shares, and in 2005 increased its stake to 34 percent in an agreement that gave the French group the option to buy control of Pao de Acucar. Earlier this month, Casino raised its stake to 37 percent after Diniz reportedly held talks with Carrefour.

Diniz, a sports enthusiast who runs in the New York Marathon, started to expand through acquisitions in 2009. In June that year, Pao de Acucar bought Globex Utilidades SA, owner of the Ponto Frio chain of electronics and home-appliance stores, from Lily Safra, the widow of the late billionaire Edmond Safra. In December 2009, Pao de Acucar agreed to buy Casas Bahia Comercial Ltda. to expand in home appliances.

‘Very Good Deal’

Brazil’s antitrust agency is still evaluating the 2009 acquisitions, which gave Pao de Acucar combined sales of 40 billion reais ($25 billion) annually and more than 1,700 stores. If the merger with Carrefour goes through, the agency would analyze all deals jointly, said Fernando de Magalhaes Furlan, president of the antitrust agency, in an interview yesterday.

“Certainly to have announced something of this size, they’ve already studied the problems they could encounter,” said Marcelo Varejao, an analyst at Sao Paulo-based brokerage Socopa Corretora. “The deal is very good for Pao de Acucar. Apart from the large synergies of the operation, you end up eliminating one of its direct competitors.”

-- With assistance from Felipe Frisch and Alexander Cuadros in Sao Paulo, Stephen Taylor in Paris and Thomas Mulier in Geneva. Editors: Celeste Perri, Adriana Arai

To contact the reporters on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net; Fabiola Moura at fdemoura@bloomberg.net.

To contact the editor responsible for this story: Francisco Marcelino at mdeoliveira@bloomberg.net.


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