It buys the third food retailer in the country, Grupo Big, when its subsidiary already leads the ‘cash a carry’
Carrefour has carried out a smart operation that would not be allowed on its territory. The French supermarket operator is going to buy Brazil’s third largest food retailer, Grupo Big Brasil, for 7 billion reais (1.1 billion euros). The price seems reasonable and the cost savings juicy. Searching abroad makes more sense than searching the slow-growing domestic market.
France is a difficult place for foreign buyers. In January, the government of Emmanuel Macron blocked a € 16 billion acquisition of Carrefour by Canadian convenience store operator Alimentation Couche-Tard.
The protection of jobs and the food supply of foreign owners were behind the decision. However, Carrefour has not encountered such opposition to this operation, which is carried out through its Brazilian unit, which is already the largest operator of cash and carry from the country.
Big operates 387 stores and generated sales of 24.9 billion reais (3.810 million euros) in 2020. Carrefour Brasil, which is listed on the Stock Exchange, will pay 70% of the price in cash and 30% through new shares. Once completed, the Carrefour Group will own around 67.7% of Carrefour Brasil, compared to the current 71.6%.
Without a doubt, it will mean a great cost saving. Although Carrefour is buying it from the acquisitions fund Advent International and Walmart, which are not careless managers, it expects to obtain 1.7 billion reais (260 million euros) of synergies by 2024, thanks to greater supply chain efficiency, an acceleration of e-commerce strategy and increased store profitability thanks to higher sales density.
The price is not very high: equivalent to 7.5 times the Big Group’s ebitda; Carrefour’s Brazilian unit, known as Atacadao, is valued at about 8 times.
Over time, the French group wants to raise Big’s profitability until it reaches that of its own Brazilian unit. Suppose that Carrefour CEO Alexandre Bompard can bring the Big Group’s ebit margin to the level of Atacadao, 6%. With last year’s sales, it would obtain 1.5 billion reais (230 million euros) in operating profit. If taxes are removed, the return on invested capital is a whopping 15%, above the cost of capital for the industry, which is approximately 12%.
Carrefour has no choice but to expand outside of France. Its domestic market is barely growing, and it is likely to face renewed competition from discount retailers, such as Germany’s Aldi, and online groups such as Amazon.
Following this operation, Carrefour will be a dominant player in a market where sales grew 18% last year. Luckily for him, some countries accept foreign capital.