Current Price: $3.03
Target Price: $3.67
Expiration Date: Q2 2023
This idea was shared by Povilas.
This is an interesting spin-off situation in LATAM with an unusually large discount to the sum of the parts (SOTP) valuation. I got intrigued by this situation after reading this Twitter thread. The case includes multiple moving parts and exposure to risky sectors/businesses with limited information available as well as the involvement of some shady parties. Despite these risks, the valuation gap here is so extreme that even with conservative assumptions I land at 20% upside. The setup is likely to play out shortly, most likely in this current quarter. I present my analysis below and will be glad to hear feedback from SSI members with more experience in the retail sector of LATAM.
Companhia Brasileira de Distribuicao is a Latin American retail consortium that trades as an ADR on NYSE under the ticker CBD. CBD operates several supermarket banners in Brazil and also owns large stakes in two publicly listed companies – French e-commerce platform Cnova (34% stake) and Columbian grocery retailer Almacenes Exito (96.5% stake). The key catalyst here is the spin-off of CBD’s Exito stake (83.2%) to shareholders. As part of the transaction, shareholders will receive 4 Exito shares (also in US ADRs) for each CBD share. At current Exito prices, the spin-off distribution is worth significantly more than the whole market cap of CBD – $3.64 per CBD share vs $3.03 current trading price. Even assuming 15%-20% decline in Exito’s share price post-spin-off, investors would still be getting the remaining CBD’s Brazilian retail operations as well as other balance sheet investments for free.
The transaction has already been approved by shareholders and is set to close in Q2 2023. Only customary approvals from SEC and Columbian security regulators remain.
The valuation gap is vast and there are two key risks that at least partially explain it.
- Potential hard sell-off of Exito stock after the spin-off. Despite the already low valuation multiple of 3x EBITDA, the market seems to be pricing in a material discount for the Columbian retailer. Exito is currently listed only on the on Colombia Securities Exchange (ticker EXITO.CL) and trades with limited liquidity. The spin-off transaction will create ADR shares and a high number of current CBD investors/arbitrageurs might dump the newly-received shares post-spinoff. Who in their clear head would want to own a Columbian retailer?
- Uncertainty around the RemainCo valuation. The RemainCo will have a substantial amount of leverage and the ‘true value’ 34% in Cnova might be materially lover vs Cnova’s current market cap (ticker CNV.PA) which is based on the limited float and almost non-existent trading liquidity.
I think the market is overestimating both of these risks and at these prices, the margin of safety is sufficient to accommodate very large discounts to all of the moving parts in CBD’s SOTP valuation.
Below, I provide some discussion on these points as well as share a couple of SOTP valuation scenarios. TLDR, at 20% Exito sell-off, you’re buying the RemainCo for $0.12/share, whereas it is likely worth somewhere between $0.48-$1.26/share.
How much will Exito stock drop after the spin-off?
The market is definitely expecting a monstrous sell-off of Exito shares after the distribution. CBD’s shareholder base is centered around investors from Brazil, including Brazil’s largest investment bank BTG Pactual which is CBD’s second-largest shareholder and owns a 7% stake. Many Brazilian shareholders might not want to hold Columbian stock. Management has also mentioned this, “Obviously, there are going to be some investors, especially Brazilian investors who are not going to have or want to have a position in Colombia for reasons of management policy”. The same applies to ADR holders in US.
While it’s definitely possible that Exito shares will sell off to some extent, there are arguments suggesting that at current prices this risk is overblown.
Exito valuation already looks relatively ‘undemanding’. The stock currently trades at 2.8x 2022 adj. EBITDA vs 2.3x-4.1x multiple range during 2018-2023. Exito has grown its top line by 39% since 2018 and runs on 25% gross and 9% adj. EBITDA margins. There are no direct listed Columbian peers available. A somewhat comparable LATAM peer Cencosud (operates supermarkets, department stores, shopping centers, and home improvement stores in Colombia, Peru, Chile, Brazil, and Argentina) trades at 5.2x 2022 adj. EBITDA. However, Cencosud has been growing faster both in revenue and adj. EBITDA basis (some of that is non-organic, but same-store sales info is not provided) and operates on a bit higher margins – 29% gross and adj. EBITDA at 11%.
On the opposite spectrum, the new ADR listing in the US and significantly improved liquidity/free float (from 3.5% now to 53%) might also create substantial new demand for the stock and might absorb a large part of the initial selling pressure. CBD’s management has also talked about this and noted that Exito should get materially higher interest from the US and Columbian investors (especially pension funds) after the spin-off.
And this movement of sales — in this movement, we understand that’s going to be offset on the other side by Colombian investors and especially North American investors. So we hope to see a redefinition of the investors with fewer resilience and more Colombians and more Americans. We don’t know what’s going to happen in the next step, but we have made a very important move considering the quotations that we made in the regions, Bogota, Sao Paulo, New York. So we can see that there’s a very broad base of investors that will be able to absorb this sale. And we see that our other investors interested in this Colombian asset.
I would like to add saying that those investors need to think about the pension funds in Colombia, seems we are going to have a higher level of floating, and it’s inevitable that they are going to have Exito in their portfolio, and there will be natural buyers of our shares.
It’s also important to note, that the largest CBD shareholder Casino Group, which will own 34% of Exito after the spin-off, will not sell its stake right after the distribution. CBD management has specifically indicated (quote below) that Casino does not intend to immediately dispose of the shares and will take time to look for the best moment to sell. I think the dynamic here might be similar to CBD’s ASSAI spin-off in March 2021, where Casino sold its 30% stake much later through secondary offerings years later – in and .
In relation to the second question in relation to the sale of Casino. We still do not have this information. We have no estimate. Exito is an asset that is valuable with the potential to grow to increase its profitability. The financial performance of the past years was exceptional. Its financial structure is very solid as well, very sound. So Casino will continue accompanying Exito in terms of value. And then we will check what will be the best moment to sell the equity of Casino.
I think it’s conservative enough to assume that after distribution Exito will sell off by 20%. At that level, the Columbian retailer would trade at just 2.2 adj. EBITDA – the lower limit of the valuation range over the last 5 years. This is really only a guesstimate on my side based on the points above and the eventual sell-off could turn out to be lower. But I would expect a larger than 20% share price drop to be only temporary.
The assumed 20% sell-off in the post-spinoff Exito shares leaves the CBD RemainCo valued at only $0.12/share (or c. $33m). The RemainCo will consist of:
- GPA, core Brazilian supermarkets business – worth $265m at 5x EBITDA;
- 34% stake in publicly listed Cnova, worth $482m at current prices;
- 13% stake in Exito – worth $196m at current prices;
- less $452m in net debt.
This would sum up to total RemainCo equity value of $491m or $1.82 per CBD share. However, that assessment for teh SOTP value would be way too optimistic.
The biggest uncertainty in the valuation of the RemainCo is the stake in Cnova. Cnova is an e-commerce platform business (think of Amazon) with operations in France (Cdiscount) and Brazil (Cnova Brazil). The company is listed on Euronext Paris. At the current share price, CBD’s stake would be worth $480m or $1.78 per CBD share. However, the stock is extremely illiquid (just 1.4k shares trade daily on average) and has a free float of just 1%. Aside from the 34% ownership by CBD stake, most of the remaining shares are in the hands of Casino Group. Due to this illiquidity, I do no think market is valuing Cnova correctly and the actual valuation should probably be much lower.
At the current market price, Cnova trades at 1x 2022 sales and 32x 2022 adj. EBITDA (96x adj. EBITDA after deducting rent). Meanwhile, both the operational performance of the business and, especially, the balance sheet are in dire straits. The business is not growing. Net sales were flat for multiple years except for a very minor/insignificant boost from COVID, whereas in 2022 the top line crashed by 20%, and adj. EBITDA fell by 50%. The company rapidly burns cash (€136m last year and €131m in 2021) and is basically living off the financial lifeline provided by the Casino Group. The remaining unused credit lines from Casino Group stood at €330m at the end of 2022. Cnova is already quite levered and has €372m net debt vs just €52m adj. EBITDA (before deducting €35m in rent expense). Cnova was already forced to divest assets last year and also in Q2’22 started a transformation plan to cut costs by €75m, however, the impact of the plan has clearly not been sufficient so far. If the current business performance continues, it seems quite unlikely that Casino will just continue to indefinitely burn hundreds of millions EUR on this business.
Cnova has already tried tapping into equity markets before – in June 2021 when the shares traded at €10 vs €3 now. At the time, it was rumored that Casino had been looking to sell part of its stake. Despite the much higher market value, a better financial standing of the company, and a much more favorable equity financing environment in 2021, the plans failed and the equity raise was called off in Oct’21 due to “challenging market conditions”.
My bottom line is that the fair value of Cnova is probably substantially lower than reflected by the current market price. This in turn also puts pressure on the CBD’s RemainCo valuation.
Core business – GPA
CBD’s supermarket business GPA is Brazil’s third largest food retailer with three supermarket banners that operate grocery stores, gas stations, and drugstores. 11% of sales come from e-commerce operations. The company’s operations are centered around Sao Paulo and several of Brazil’s Northeastern cities. Since the recent organizational changes initiated in 2021, GPA has been undergoing a shift towards the supermarket, proximity, and multichannel-focused operating model, with changes in the clustering of stores, pricing, and management of stock. In 2021, GPA/CBD spun off its cash and carry stores Assai, which was considered to be the best part of the overall business, a crown jewel asset of CBD. In 2021/2022, CBD sold/converted most of its Brazilian hypermarket stores (which was considered to be the worst part of the business).
There are no directly comparable peers in Brazil. Two somewhat similar companies are Grupo Mateus and Sendas Distribuidora (the same Assai that was divested in 2021). Both of these operate mostly cash and carry stores (cheaper wholesale warehouses targeted at business customers, e.g. hotels, and caterers, that buy in bulk). Cash and carry is considered a better quality business and a much faster-growing sub-sector in LATAM (partially due to the very large inflation of grocery prices). Both of these peers trade at around 9x adj. EBITDA after deducting rent. GPA will likely be worth a bit lower multiple.
How much might the RemainCo be worth?
My SOTP valuation scenarios for the RemainCo are presented in the table below. For all scenarios I assume a 20% sell-off for Exito after the spin-off.
- Bull case – $1.16/share. I assume 40% discount for Cnova stake (see above for reasons), and a 6x EBITDA after leases multiple for GPA.
- Base case – $0.78/share. Assumptions – 50% discount for Cnova stake, and 5x EBITDA after leases for GPA.
- Bear case- $0.41/share. Assumptions – 60% discount for Cnova stake and 4x EBITDA after leases for GPA.
I think my overall assumptions here are fairly conservative. 40%-60% discount for CBD would imply 0.5x-0.7x sales multiple. GPA valuation at 4-6x adj. EBITDA after lease expenses seems reasonable given the above-mentioned higher-quality peers at 9x.
Overall, the situation seems to have considerable upside potential even in the bear-case scenario. Adding up the Exito spin-off distribution and RemainCo SOTP valuation, here’s how the total upside potential looks like:
Even if one changes the assumptions for potential Exito sell-off to 30%, the bear/base/bull case upside changes to -2%/10%/22%. Hence, I think the downside is well protected at current levels if Exito stock does not decline by more than 30%, at which point the company would be valued under 2x EBITDA.
An additional risk of Casino Group’s involvement
Aside from macroeconomic/political risks associated with Brazil and Columbia, low valuations of CBD and Exito might be explained by investors’ caution with Casino Group, which is the parent/controlling company of CBD. Casino Group of CBD and controls 5/9 board seats. After the Exito spin-off, it will also own 34% of the Columbian retailer.
Casino has a track record of highly self-interested related party transactions. For example, as part of corporate restructuring in 2019, CBD acquired its current 96.5% stake in Exito through a strange tender offer, which was done at a significant 24% premium to Exito’s pre-announcement levels. The major Exito shareholder at the time was, of course, Casino Group, which gladly participated in the offer. The strange aspect here is that despite acquiring a 96.5% stake in the tender, CBD did not proceed to fully privatize Exito and instead just left it hanging on the public markets with this negligible free float. This kind of suggests that the tender might’ve been mostly made to just cash out Casino at a premium. In 2021/2022 a similar thing happened when CBD sold its least attractive hypermarket stores to previously spun-off Assai (Sendas Distribuidora) at a high price of 0.6x EV/sales (vs CBD’s 0.4x multiple at the time). The valuation raised analysts’ concerns for Assai, including the lack of consultation with minority shareholders.
Besides that, Casino’s history has several other shady spots. The group is currently under investigation for financial manipulation and insider trading during 2018-2019 when the company became a target of short-sellers given its high levels of debt and complex ownership structure. One example is that at the time Casino misleadingly stated it was in merger talks with its rival Carrefour – this announcement boosted its share price but the talks were later denied by the peer. One of the key issues for short-sellers was Casino’s “discrepancies in cash balances between different sets of accounts”, however, Casino just explained it as “a tax-efficient way to transfer money around the group”.
Casino has been struggling with its very large debt burden amidst deteriorating financials. Debt stood atThe group is unprofitable and has started burning cash, while investors are concerned that Casino will not be able to meet its covenants and upcoming maturities – €1.3bn in Jan’24 and €2.3bn in Aug’25. Casino has been disposing of assets for several years now with €4.1bn in cumulative asset disposal proceeds from 2018 to 2022. It is quite likely that Exito’s spin-off was at least partially prompted by Casino’s deleveraging dynamics..
Nonetheless, it’s worth noting that the way Casino carried out Assai spin-off from CBD in 2021 was commendable. The transaction was a great success and Assai stock skyrocketed by 50%+ in the several months following the divestment. Meanwhile, Casino did not dump its shares in the open market and unloaded the stake only two years later through secondary market offerings.