Quick Pitch: Almacenes Exito (EXTO)

Merger Arbitrage + Higher Bid – Upside TBD

A US-listed Colombian grocery retailer Almacenes Exito received tender offer for all of its shares from peer food retailer Grupo Calleja at $7.24 per ADR. There is a low-risk 4% spread to the current offer, plus we have a chance that the offer will be raised or other bidders will emerge.

Let’s start with the $7.24 offer. At the moment we only have a press release and the tender has not been officially launched yet. Exito’s ex-parent CBD as well as CBD’s major shareholder Casino Group have pre-agreed to tender their combined 47% Exito stake – thus the 51% minimum condition is almost guaranteed to be met. Casino Group is in financial distress and most probably is getting rid of EXTO’s stake in a firesale mode in order to advance the ongoing restructuring efforts.

With the closing of this offer (expected around year-end) Gruppo Calleja is set to own a controlling stake in Exito. Grupo Calleja is El Salvador’s conglomerate with interests in supermarkets, real estate, and financial services. It operates the largest supermarket chain in El Salvador. Probably there are limited synergies to be achieved with this purchase as Colombia is more than 1,000 miles away from El Salvador.

Despite coming at a 45% premium to pre-announcement prices, the current offer might not be sufficient to convince all shareholders to tender. If Grupo Calleja wants to take Exito private, it might need to make a higher offer down the line. EXTO was listed in the U.S. only at the end of August (previously had a listing in Colombia with low float and non-existing liquidity) when the company was split off from CDB. See this SSI write-up for more background. The trading history is very limited and Exito market price might have been affected by post-split-off trading dynamics and therefore not indicative of the true value of the assets.

EXTO seems inexpensive trading at 4.3x TTM EBITDA. This compares to 6.4x EBITDA multiple for a somewhat comparable but faster-growing peer Cencosud which operates supermarkets, department stores, shopping centers, and home improvement stores in Colombia, Peru, Chile, Brazil, and Argentina. Grupo Calleja might need to offer a materially higher price to convince all shareholders to sell.

There might also be other parties interested in the Colombian supermarket business, but I am not sure if CBD/Casino can exit from their pre-agreements with Grupo Calleja in case a higher offer is received.

• Back in the summer media reports speculated that Cencosud might also be interested in acquiring Exito to expand its presence in Colombia. A former Cencosud insider/manager has reportedly confirmed that Exito has been positioned as a potential acquisition target for a long time. Cencosud has previously negotiated to acquire Exito in 2016 and 2021, but the talks did not progress.
• Another potential buyer here is Colombian billionaire Jaime Gilinski, who already made two proposals for Exito in the summer before it was split off from CBD. The first offer was for a 96.5% stake in the Colombian retailer. The second proposal was only for a 51% controlling stake but at a 30% higher prices (US$7.09/ADR). Both bids were rejected because prices fell short of being “financially reasonable for a transaction aiming at a controlling interest”. The current tender from Grupo Callejo comes only at a 2% premium to Gilinski’s last bid. Gilinski does have a track record of persistently sticking to his acquisition targets. E.g. after getting rejected in the recent takeover battle for Nutresa, the largest food maker in Colombia, Gilinski’s led buyer consortium proceeded to make 8 separate tenders to amass a stake in Nutresa and then eventually took over the company.