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Billionaire Catching Wal-Mart Brazil as Cencosud Surges

June 20, 2012

Billionaire Catching Wal-Mart in Brazil as Cencosud Quadruples

Customers exit a Wal-Mart Stores Inc. location in American Canyon, California. Photographer: David Paul Morris/Bloomberg

On four separate occasions last year, Horst Paulmann, the billionaire supermarket mogul who controls Santiago-based Cencosud SA (CENCOSUD), sat down with members of the Cunha family of Rio de Janeiro and regaled them with stories of his modest beginnings and immigrant roots.

It was a narrative that resonated with the family’s patriarch, Joaquim Cunha, another supermarket baron who himself had emigrated from Portugal to Brazil as a teenager in the 1950s. His daughter Andrea gave details of the talks in an interview at her family’s office in Rio’s Barra da Tijuca neighborhood on June 1.

Paulmann, 77, wanted to persuade the Cunhas to sell him their supermarket chain for 875 million reais ($431 million), rather than take a higher offer from Wal-Mart Stores Inc. (WMT:US) By the end of the fourth meeting, put off by Wal-Mart’s habit of sending new faces for each stage of the talks, the Cunhas had made their decision.

“The contact with Cencosud was much more pleasant than with Wal-Mart,” said Andrea, 34, who was chief executive of Prezunic Comercial Ltda. before the November sale. “My father is very similar to Horst Paulmann. His love is supermarkets. It was a meeting of two people with similar histories.”

Wal-Mart declined to comment on the talks via e-mail.

Investor Meetings

The acquisition -- Cencosud’s fifth of a Brazilian supermarket chain in as many years -- is helping Paulmann close the gap on Wal-Mart and other rivals in the region’s biggest economy. Now the German-born entrepreneur, who has overseen a fourfold jump in Cencosud’s shares since its public offering in 2004, is looking to raise more than $1 billion to reduce debt and continue his expansion in Latin American.

With JPMorgan Chase & Co. and UBS AG among his advisers, Paulmann has been meeting with investors in the U.S., Europe and Asia this month, touting his ability to navigate a global slowdown and deliver earnings growth from a company cobbled together from at least 16 acquisitions in the past decade. He’s the most-active deal maker in Latin American retail, data compiled by Bloomberg show.

Paulmann’s road trip is part of a plan to sell as many as 243 million shares in a primary offering that would be worth 678 billion pesos ($1.4 billion) at its closing price on June 19. As much as $745 million will be used to pay debt and $480 million to buy a 39 percent stake in its Jumbo Retail Argentina SA unit from UBS AG, according to a June 13 notice in Chile’s El Mercurio newspaper.

Opening Bell

Paulmann is scheduled to ring the opening bell at the New York Stock Exchange June 22, a Cencosud official, who refused to be named citing company policy, said June 18.

Under Paulmann’s command, what began as a family-run restaurant has turned into a $16 billion retail empire with 726 supermarkets, 81 home-improvement stores, 74 department stores and 25 shopping malls spanning Argentina, Brazil, Chile, Colombia and Peru. Paulmann personally controls a 40 percent stake in the company, with another 25 percent in the hands of family members, according to a May 25 prospectus filed with the U.S. Securities and Exchange Commission.

His holding gives him an estimated net worth of $5.2 billion, making him the second-richest person in Chile behind Luksic family matriarch Iris Fontbona, according to the Bloomberg Billionaires Index. He has poured most of his dividends back into the company through rights offerings, data compiled by the Chilean securities regulator and Bloomberg show.

Cencosud’s press office declined to comment on Paulmann’s personal fortune or make him available for comment.

Argentina Investment

Even amid the market turmoil brought on by Europe’s debt crisis, Paulmann shouldn’t have any trouble selling the shares, said Eric Conrads, who helps manage $1 billion in stocks at ING Groep NV in New York.

“The big question mark is Argentina,” Conrads said in a June 14 phone interview. “Then again, they’ve been making money every year since they’ve been in Argentina.”

Paulmann cut his teeth in Argentina in the 1980s when inflation spiraled above 1,000 percent a year. He continued investing there after a record sovereign debt default in 2001 and plans to buy the remaining stake in Cencosud’s local supermarket unit from UBS AG in a year in which President Cristina Fernandez de Kirchner nationalized the biggest oil company and tightened import restrictions.

“We have survived several crises,” Paulmann told shareholders in Santiago April 24. “Argentines respect the company.”

Today, Argentina accounts for 28 percent of Cencosud’s sales, down from 73 percent in 2001, as the company expands in the rest of the region, particularly Brazil.

More Aggressive

Paulmann’s confidence in his company’s prospects is such that he’s pledging as many as 80 million of the family’s shares, worth $451.7 million as of yesterday’s close, to finance the purchase of additional stock in the sale, according to the prospectus filed with the SEC.

Paulmann has been more aggressive than Wal-Mart in buying Brazilian chains. His five deals in five years are worth a combined $1.8 billion. By comparison, since opening its first store in Brazil in 1995, his Bentonville, Arkansas-based rival has completed just two for a total of $1.1 billion.

Fourth Ranking

As a result, Paulmann has increased his share of the Brazilian supermarket business to 4 percent, advancing on Wal- Mart’s 10 percent, according to data compiled by the Brazilian Association of Supermarkets, known as Abras. Up until last year, Cencosud had failed to register on Abras’s ranking of Brazil’s biggest supermarket players. It now ranks fourth, just behind Wal-Mart.

“He wanted the asset and was willing to do whatever it took to get it,” said Andre Bhatia, a partner at Washington- based private-equity firm Acon Investments LLC, which sold G Barbosa Holding SA to Paulmann in 2007 for $430 million. “They seem to be very aggressive in making acquisitions in Brazil. Clearly they’re talking to everybody.”

When Paulmann does talk, he does so in a thick German accent even after arriving in Chile as a teenager following World War II. After the death of his father in 1957, he and his older brother Jurgen took charge of the family’s restaurant in the southern Chilean town of Temuco, expanding it into a series of supermarkets over the decade that followed.

Horst parted ways with his brother in 1976, when he decided to open stores in Santiago, according to “The Elephant’s Steps: The Empire of Herr Paulmann,” a 2011 biography by Paulina Andrade and Marcelo Cerda. The title refers to the mascot of Cencosud’s Jumbo supermarkets, a smiling elephant.

Paulmann didn’t finish high school and has few interests outside of work, according to Oscar Anwandter, who led Cencosud’s supermarket division between 1976 and 1996.

‘No Social Life’

“Horst Paulmann thinks about work every single waking hour,” Anwandter said in a telephone interview on May 23. “You can’t even imagine him relaxing or playing golf. He has very few friends and practically no social life.”

Compared to some other Latin American billionaires, Paulmann leads an austere lifestyle, taking commercial flights and driving a 1990s model Mercedes Benz. According to the biography, when one of his managers suggested he upgrade his car, Paulmann said, “Why, if I can still get around in it?”

Paulmann’s leadership is of such importance to the success of his company that Cencosud’s prospectus lists its dependence on him as a material risk. Nearing his 78th birthday, he’s given little indication of a succession plan.

Children’s Stake

His oldest son, Manfred, spent many years pursuing his own business ventures before taking on a bigger role at Cencosud when he was named vice-president of the board in 2008. He quit just two years later amid local media reports of disagreements between him and his father. Manfred declined to comment in an e- mail.

Manfred’s brother and sister, Peter and Heike, remain on the board. Heike, who leads Cencosud’s Aventura Center family- entertainment division, was the only one of the three to visit Rio de Janeiro as part of the negotiations to buy Prezunic, Andrea Cunha said. All three of Paulmann’s children own personal 6.9 percent stakes in the company, according to Cencosud’s prospectus. Each of those holdings is worth almost $880 million at the June 19 closing price.

For now, Horst remains in control. Between investor meetings in New York and Asia, he oversaw the June 12 opening of his Costanera Center shopping mall in Santiago, which had been delayed for years as construction stalled in the wake of the 2008 financial crisis. Its glassy main tower is the tallest building in South America.

Paulmann has let his intuition guide him in his quest to expand his retail empire, according to Anwandter, the former head of Cencosud’s supermarket division.

“He has an extraordinary virtue of knowing beforehand what project may work or not,” Anwandter said. “He doesn’t make business plans.”

To contact the reporters on this story: Alexander Cuadros in Sao Paulo at acuadros@bloomberg.net; Eduardo Thomson in Santiago at ethomson1@bloomberg.net

To contact the editor responsible for this story: Matthew G. Miller at mmiller144@bloomberg.net


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