PARIS/SAO PAULO (Reuters) - France’s Carrefour (CARR.PA) moved on Tuesday to snatch control of Brazil’s No. 1 retailer from its archrival Casino (CASP.PA), a deal that will expand its presence in a top emerging market but likely face stiff opposition in courts.
The proposal to merge Carrefour’s local unit with Pao de Acucar (PCAR4.SA), which came with critical financial backing from Brazil’s government, would essentially ruin Casino’s plans to take control of the retailer.
The deal illustrates how European and North American retailers are willing to pay high costs and endure lengthy litigation to increase their market share in developing countries, many of which are growing at a far faster pace than their stagnant home markets.
Carrefour, weakened by three profit warnings since last autumn, is betting on emerging markets to help offset weak sales at home.
The transaction would also allow Brazil’s left-leaning government to keep Pao de Acucar, which was founded in 1948, from falling fully into foreign hands. Carrefour would be limited to no more than a 50 percent stake in the new unit -- assuming the deal wins shareholder and regulatory approval.
“It won’t be an easy merger. It faces a number of challenges ahead,” said Flavio Barros, who helps oversee $240 million in assets at Sao Paulo-based Grau Gestao de Ativos.
Yet Barros said that investors were already encouraged by the possible creation of a new giant that could dominate more than a quarter of Brazil’s retail market -- as evidenced by Pao de Acucar’s 12.6 percent jump on Brazil’s main stock exchange.
“Strategically, it actually does look like a pretty good deal. It’s the first bit of good news we’ve heard from Carrefour for a while,” said Sanford Bernstein analyst Christopher Hogbin.
The proposal values Pao de Acucar at about $11 billion. The companies did not agree on an upfront payment.
Casino said it would fight the deal, which it must approve because it is a shareholder in Pao de Acucar. Yet shareholders seemed to bet that a compromise will be reached to allow the deal to go through. Carrefour shares rallied 3.7 percent and Casino’s tumbled 5.6 percent.
Joining Brazil’s top two retailers could create a company with annual sales of $41 billion and a payroll of 212,000 employees, the largest in the country’s private sector. It could have a 27 percent market share, compared with 11 percent for Wal-Mart Stores Inc (WMT.N), the country’s No. 3 retailer.
The talks with Carrefour were initiated in April by Abilio Diniz, Pao de Acucar’s flamboyant chairman, sources told Reuters last month.
Under terms of the accord, the combined company will receive 1.7 billion euros ($2.4 billion) in fresh funds from Brazil’s BNDES state development bank, and 300 million euros from local securities firm BTG Pactual.
The heavy participation of BNDES in the deal builds on a Brazilian government strategy in recent years of favoring the creation of homegrown conglomerates in sectors deemed strategic -- such as food processing, telecoms and, now, retail.
Gama, a private equity investment vehicle created by BTG, will combine Carrefour and Pao de Acucar assets into Nova Pao de Acucar, as the company will be named. BTG committed to extend 500 million euros in loans to Gama.
Gama and Carrefour will have 50 percent stakes in Nova Pao de Acucar. The deal will also require shareholder approval from the boards of Pao de Acucar and Carrefour.
“We will have massive scale gains if the transaction is approved,” said BTG senior partner Claudio Galeazzi, who was chief executive of Pao de Acucar until last year, at a news conference. The cost savings from the merger could reach 1.7 billion reais, he said.
Casino called the proposal “illegal” and expressed its disappointment with Diniz for negotiating a deal without its authorization.
Yet Diniz has shown he does not shy away from fights.
A fitness fanatic known as an aggressive dealmaker, he persisted in his plans for the merger rather than having to cede control of the company that his father founded. In the 1980s, the tycoon engaged in a battle for control of Pao de Acucar with his brothers that almost bankrupted the retailer.
Casino came to Pao de Acucar’s rescue in the late 1990s, providing the company with capital and expertise to overcome the impact of those disputes as pressure from Carrefour and Wal-Mart hurt profits and eroded market share.
Regulators will likely seek to limit the dominance of Pao de Acucar and Carrefour in the states of Sao Paulo and Rio de Janeiro, Brazil’s largest.
Both companies might have to close or dispose of a significant number of stores in those markets to get the nod from regulators, said Daniela Bretthauer, an analyst with Raymond James in Sao Paulo.
Members of Brazil’s antitrust regulator Cade have said they would curtail excess market power by big companies, even if these were formed with the government’s blessing -- like food processor Brasil Foods. (BRFS3.SA)
Brazilians for decades preferred to shop in mom-and-pop stores because they were close to their homes, and because of grocers’ willingness to extend informal credit. But as the bigger chains grew in size, inflation slowed and incomes rose, more households turned to supermarkets that offered to finance their purchases of foods, apparel and appliances.
Brazil’s population is three times that of France, and its $2.1 trillion economy is 80 percent as big. Growing at 5 percent a year, Brazil could top France as the world’s No. 5 economy in less than a decade.
Editing by Guillermo Parra-Bernal, Brian Winter, Robert MacMillan and Matthew Lewis