What will happen to K-Rauta stores after the purchase of Leroy Merlin. Details
The Federal Antimonopoly Service has allowed Lenta to buy the business of the Finnish hypermarket chain K-ruoka, the Vedomosti newspaper writes. The deal will be closed on November 30, a Lenta representative added. The chain will get 10 hypermarkets and one K-ruoka supermarket in St. Petersburg and the Leningrad region and three land plots. The transaction amount is 11 billion rubles.
K-ruoka hypermarkets are open until November 30, and on December 7 they will open under the Lenta sign, say two employees of one of the chain’s hypermarkets. On Wednesday, November 23, K-ruoka announced the sale of alcoholic beverages with a 50% discount. A person who visited one of the network’s hypermarkets on this day Leningrad region, said that there was an incredible excitement going on there. Visitors literally swept goods off the shelves. The same thing happened on Thursday in one of the stores in St. Petersburg, which was visited by a Vedomosti correspondent. Many shelves were half empty, and long lines at the cash registers stretched across the entire hall. By evening, in one of the hypermarkets, instead of alcohol, there was lemonade on the shelves. In the last two days of work - November 29 and 30, discounts will be announced on perishable and other products, a hypermarket employee said. A K-Rook representative declined to comment.
Finnish Kesko reduces presence in Russia
To transfer K-ruoka alcohol to Lenta, you need a license for wholesale trade alcohol, follows from the responses of lawyers from Kachkin and Partners and the A2 law office. But the network does not have one, according to data from the Federal Alcohol Regulatory Agency. Perhaps the owner of the brand, Kesko Food Rus LLC, did not have time to obtain a new license. The companies announced the negotiations on October 21. The general period for issuing a new license is 30 days, but it can be extended for another 30 days, says Artem Berlin, a lawyer in the corporate and arbitration practice of Kachkin and Partners. K-ruoka has been systematically reducing purchases from suppliers since the announcement of the deal, so its inventories are small, one of the suppliers said.
The influx of people due to the sale of alcohol stimulates sales of other goods in the hypermarket, says General Director of Infoline Analytics Mikhail Burmistrov. Indeed, many visitors are disappointed when they find out that the store offers discounts only on alcohol, but still do not leave.
Discounts of 50% on alcohol mean that the retailer is selling it at a loss, says a top manager of a federal retail chain. According to him, for elite alcohol the markup can be 30-35%, maximum 40%, but this is in very rare cases. The discount is very serious, agrees Vadim Drobiz, general director of the Center for Research of Federal and Regional Alcohol Markets. But in some cases, its size may be smaller due to the minimum retail prices for alcohol set by the state.
Lenta has no obligation to purchase inventory and this standard practice upon change of owner shopping facility in the FMCG sector, says General Director of Infoline Analytics Mikhail Burmistrov. Lenta has a completely different product matrix, so the retailer will fill hypermarkets in a new way, says one of its suppliers. The goods will not be transferred to Lenta from K-ruok; new supply agreements have been concluded with Lenta to the addresses of the Finnish chain stores, confirms the commercial director of the Piskarevsky dairy plant, Georgy Zhitmarev.
As it became known, " ", " " plans to acquire a chain of Finnish hypermarkets " " in Russia. The chain has 11 stores in St. Petersburg and the Leningrad region (with a total retail area of about 49.2 thousand m2), its turnover according to RAS in 2015 amounted to 7.7 billion rubles. According to Infoline, Lenta's share in St. Petersburg in the food market is 13.8%, and K-ruoki's is 0.7%.
Both sides confirmed the fact of negotiations, and late Friday evening they published information about this on their websites, refusing further comments. According to market participants, Kesko planned to earn at least 13–14 billion rubles for the K-ruoka network. At the same time, the holding has invested twice as much in the development of the network since 2012. However, there were no buyers for that amount. Experts estimated the transaction amount at 11 billion rubles. Today the parties are expected to announce the agreements reached.
Agile "Ribbon"
Negotiations with Kesko about the purchase of the K-ruoka network were conducted by many retailers, including "" and "". “But Lenta beat the price, offering 20% more than the others. Kesko really wants to close the deal by the end of the year,” says a top manager of one of the hypermarket chains. “The deal will amount to 10–11 billion rubles. Lenta representatives are already attending K-ruoka meetings,” said a source familiar with the progress of the negotiations.
DP wrote in May of this year that “K-ruoka” was put up for sale. Market participants indicated that the main reason was network inefficiency. “Of the entire network, only two stores show growth in comparable revenue, the rest are incurring losses,” a former top manager of K-ruoka said then. It is interesting that the network was developed by Oleg Buyalsky throughout the 5 years of its presence on the Russian market, former member board of directors of Auchan Russia and chief operating officer of Lenta.
According to the general director of Infoline-Analyst Mikhail, the total accumulated loss of K-ruok as of July 1, 2016 exceeded 6 billion rubles, and the net debt - more than 7.5 billion rubles; interest payments on loans alone in 2016 would have exceeded 400 million rubles. "In fact, the deal allows Kesko to least losses to exit the Russian business in the FMCG segment, which for the second year generates 2 billion rubles in losses and does not demonstrate the prerequisites for breaking even," says Mikhail Burmistrov. The expert estimated the transaction amount at 11 billion rubles, taking into account the operating and under construction hypermarkets, as well as land plots .
General Director of "" Sergey Fedorov believes that the reasons for K-ruoka's departure from the Russian market are primarily political; in addition, counter-sanctions did not make it possible to sell the Finnish assortment, and as a result it became the same as that of many other retailers.
Managing partner of Pollyanna Capital Partners Nikolay Gabyshev believes that for Lenta Finnish network will be a good acquisition, as the company will be able to strengthen its position in St. Petersburg. At the same time, retailers believe that out of 11 objects, only four - on Parachutnaya, Planernaya, Urkhovskaya streets and in Vsevolozhsk (next to Lenta) - are interesting, the rest do not have a very good location. "Lenta" will be able to increase sales in "K-ruok" stores, but sooner or later "hannibalization" will begin between stores within "Lenta" itself in St. Petersburg, since it already has a lot of them.
As for another Russian business of Kesko - DIY stores "K-raut", Mikhail Burmistrov believes that the company will not sell them. “The DIY chain continues to develop. For example, in 2016, K-rauta bought one of the hypermarkets from the Metrica chain. Although the chain has been suffering losses over the past 5 years, it is in a significantly smaller volume than K-ruoka ( 492 million rubles in 2015), and the net debt is only 244 million rubles,” says the expert, emphasizing that Kesko does not lose hope of reducing losses.
Finnish approach
The Kesko holding has been trying to enter the Russian retail food market since 2008. Then the situation was the opposite: Lenta was put up for sale due to shareholder wars, and Kesko was bidding to buy it. And she even submitted a petition to the FAS to acquire Lenta LLC (submitted by Kesko Food's subsidiary Cassa Oy). However, Kesko later notified the antimonopoly service that the company was unable to reach an agreement to acquire the network.
In 2012, Kesko independently entered the Russian market with the K-ruoka brand. At the same time, Kesko's main competitor in Finland, the SOK corporation, entered St. Petersburg in 2008 with the Prisma chain, which today has 17 stores: six hypermarkets and 11 supermarkets.
Now the network has also frozen development plans in Russia. However, according to general director Jarmo Paavilainen, the company has no plans to leave the St. Petersburg market. "The fall in demand has really affected trade, but we expect a recovery already in next year", says the top manager.
In 2013, a Kesko report reported that the holding planned to spend over 100 million euros a year on expanding the chains of food hypermarkets K-ruoka and construction hypermarkets K-rauta in Russia. Moreover, the main investments and prospects were related specifically to the product direction, and Russia was considered the key region, where retail grew by about 10% per year. In 2015, K-ruoka planned to enter the Moscow region, but never did.
“Perhaps Kesko realized that competition in the hypermarket segment in St. Petersburg is intensifying, and the holding is not ready to make new investments. Kesko entered the market when the euro exchange rate was 40 rubles, and today it is almost 70,” says Nikolai Gabyshev.
Feel comfortable
"The hypermarket format does not feel in the best possible way. The consumer strives to save money and reduce the number of purchases. Therefore, it is formats with a large assortment that are at risk,” says Natalya Kolupaeva, senior analyst at Raiffeisenbank.
Nevertheless, for Lenta the hypermarket format is just the main one, and it is increasing the pace of development. “We are developing according to schedule and intend to open 40 new hypermarkets in Russia this year, we expect to exceed our ambitious goal of doubling the retail space of the network by December 2016. Today we have already formed a portfolio of projects for 2017, so we have started work on projects for 2018,” the retailer said last week. As of September 30, 2016, the total retail area of Lenta in the country amounted to 963.4 thousand m2 (+22.3% compared to 2015).
I'm not sure that Lenta paid 20?% more than other bidders. There are reasonable shareholders sitting there and, if they read about this, they should kick out the entire management. Okay 1–2?%, but 20?% is too much! The Finns entered the market even when I was working at Pyaterochka in St. Petersburg. In order for a network to enter St. Petersburg and gain a massive share, you need to invest quite a lot of money. And their investment should have been greater. K-ruoka needed to actively develop the network - open stores or buy them. But they hesitated. Obviously, this is not the last Finnish retailer to leave the market.
Hypermarkets of the Finnish holding Kesko are finally leaving the Northern capital. They were absorbed by the domestic Lenta.
Rumors have been circulating for a long time that K-ruoka is planning to “pack its bags,” but the deal between the two giants has only now come to its logical conclusion. Company executives negotiated 11 billion rubles in cash for 11 stores, and now Finnish hypermarkets will exist in St. Petersburg and the Leningrad region until November 30. However, it should be noted that the sale of the K-ruoka grocery business to a Russian retailer affected, to some extent, directly the residents of the Northern capital.
In addition to the fact that K-Rook employs about 1,300 people, and no one asked about the preferences of St. Petersburg residents in choosing places to purchase products, the deal has already managed to cause a public stir of a different nature. The most noticeable consequence of hypermarkets leaving the market for city residents was the very generous sales. According to the announcements on the chain’s official website and in stores, from November 23 to November 30, all alcoholic beverages except foam are sold at half price, which is more than relevant for many on the eve of the New Year. The sale is valid in all stores of the Finnish Kesko Group, of which there are 11 in the Northern capital and region. In fact, on the very first day of the event, this action managed to turn into a real alcohol apocalypse.
Huge queues were heard from social networks and even conversations on the streets of the Capital of Culture. The statements about the incredible generosity of K-ruoka had to be verified personally, for which the Nevskie Novosti correspondent went to the first store he came across.
The first thing that caught my eye was those huge queues, akin to which only before New Year's, and even then not always. Second distinguishing feature- a noticeably modified food basket for the average buyer. Instead of the usual products, the carts jingled cheerfully glass bottles, which are not sold from 22:00 to 11:00 and to persons under 18 years of age. Moreover, the amount that St. Petersburg residents are buying is hard to wrap your head around. In some cases, the carts were full of boxes from various manufacturers. They are different because no more than 12 bottles of the same name are released into one person. At the same time, we should not forget that St. Petersburg, according to recent studies by Sober Russia, not only was not among the most drinking regions, but on the contrary, was included in the top 20 sober cities.
Inside the store, it seemed like they were selling the last alcohol on Earth - the shelves were practically empty, and a huge crowd was hovering around the lonely bottles on the shelves. No offense to the store staff, but merchandisers are very weak at coping with the influx of St. Petersburg residents greedy for strong drinks. More than clear evidence of this fact was the situation that occurred right in front of the correspondent: an employee of K-ruoka brought a cart with rum to the empty shelf and began to carefully put the goods on the counter. To be fair, it should be noted that the man worked quickly and carefully, but the buyers acted even more quickly - at the end of the procedure, only a few bottles remained on the shelf from the brought cart. Fortunately, it didn’t come down to battles for the treasured bottle. At least, in front of the Nevskie Novosti correspondent.
Lenta announces the closing of the deal to acquire Kesko's Russian retail business food products, currently operating under the K-Ruoka brand.
Lenta Acquired assets
Kesko's retail business includes 10 hypermarkets and 1 supermarket operating under the K-Ruok brand in St. Petersburg and the Leningrad region, as well as three land plots in the Leningrad and Moscow regions. Most of the hypermarkets were opened in 2012-2015, with two stores opened in 2016. The total retail area of the acquired stores is 42.5 thousand square meters. m, of which about 40.2 thousand sq. m are owned, and 2.3 thousand sq. m. m - for rent. The stores fully correspond to Lenta hypermarkets in compact and supercompact formats, and almost all locations organically fit into the geography of Lenta stores in St. Petersburg and the Leningrad region. The high share of store ownership is fully consistent with Lenta's strategy. Kesko's retail business is owned by six legal entities that were acquired during the transaction.
Lenta CEO Jan Dunning commented:
“We are very pleased that we were able to successfully complete the transaction with Kesko to purchase their business in Russia. The deal will significantly strengthen Lenta’s position in St. Petersburg, providing even more city residents with access to our stores close to home. The company will become the largest operator of hypermarkets in the city. The stores are located in excellent urban locations. The stores will operate under the Lenta brand, with our assortment, logistics and the company’s business processes. We expect the store integration process to be largely completed by the end of the year. Taking into account this transaction, we expect to open at least 50 hypermarkets by the end of 2016.”
Transaction approval and financing
The deal was approved by the Federal Antimonopoly Service of Russia in November. The deal is closed and no additional approvals are required. Next, the company will take certain administrative steps, including registering assets and lease agreements, updating some licenses, but these actions will be generally certified by the end of this year. The deal was financed from own funds company, as well as through a long-term credit line from a Russian bank at a rate lower than the current refinancing rate of the Bank of Russia, which will entail a further reduction in the average effective cost of Lenta's debt. JP Morgan and VTB Capital advised on the transaction.
Transaction price
The total transaction price was 11.4 billion rubles, which is 0.4 billion rubles more due to adjustments upon closing the transaction compared to the previously announced total transaction base of 11.0 billion rubles. The increase is due to the presence on the balance sheet of a larger amount than previously expected Money and their equivalents. Lenta estimates that the value of the acquired real estate and other fixed assets is positive working capital and other non-fixed assets approximately corresponds to the cost paid. The transaction will not result in a change in goodwill on Lenta's balance sheet.
Integration
The integration of Kesko stores into the Lenta network will begin immediately. Each of the acquired stores will close for approximately a week from December 1 to reopen under the Lenta brand. The stores will operate in the same way as other Lenta stores in St. Petersburg - under the Lenta brand, with the company’s assortment, using its logistics, IT infrastructure and business processes. Kesko store staff have already become part of the Lenta team. The company will make every effort to minimize the inconvenience of customers and employees during the integration period. Lenta considers highly qualified employees of Kesko stores to be its big advantage and welcomes them into its membership. Lenta has no plans to lay off staff. The headquarters of Kesko's retail business will be integrated into Lenta's office. Operationally, the integration will be generally completed by the end of 2016
Transaction forecast
Revenue. The effect of the transaction on Lenta's revenue in 2016 will be insignificant (less than 0.2% of 2016 revenue) due to the short period between the closing of the transaction and the end of the year, as well as due to the closure of stores in early December for rebranding and other integration activities. The deal is expected to add 3-4 percentage points. to the company's revenue growth dynamics in 2017, taking into account the cannibalization effect. The company expects the acquired stores to reach or exceed Lenta's average sales density by mid-2018.
EBITDA margin and net profit. The deal will have Negative influence to EBITDA margin at -0.1 p.p. and net profit at -0.2 percentage points. due to one-time integration costs. The effect on EBITDA and net profit margins is expected to be insignificant in 2017. The company expects that the acquired stores will reach or exceed Lenta's average profitability indicators by 2018.
Capital investments. All Kesko stores are newly built and high standards, therefore, capital investments in rebranding and adaptation to the Lenta format will be insignificant. In the near future, Lenta will optimize the operation of its leased and own distribution centers in St. Petersburg without significant capital investments. In the medium term, additional logistics capacity will be required in St. Petersburg to support further growth in the number of hypermarkets and supermarkets. Today the company is studying possible options solutions to this problem. Lenta's updated forecast for capital investments for 2016 is 55-60 billion rubles, including costs for the acquisition of Kesko stores.
Forecast for new Lenta store openings
New forecast for the number of hypermarket openings. The store acquisitions will increase the previously announced forecast of opening at least 40 new hypermarkets in 2016. Lenta now plans to open at least 50 hypermarkets, including Kesko stores. If the number of stores opened in 2016 significantly exceeds this forecast, then the company can optimize the number of projects for 2017 in such a way as to open at least 90 hypermarkets in total in 2016-2017.
New forecast for the number of supermarket openings. The deal will not affect the forecast for supermarket openings.
Buyers of one of the Lenta hypermarkets (Photo: RBC Petersburg)
St. Petersburg retailer Lenta and the Finnish company Kesko have agreed to sell Kesko’s food business in Russia to the K-Ruoka chain. According to the companies, the transaction amount will be 11 billion rubles.
As part of the deal, Lenta is purchasing 10 hypermarkets and one supermarket operating under the K-Ruoka brand in St. Petersburg and the Leningrad region, as well as three land plots in the Leningrad and Moscow regions. Most of the hypermarkets were opened in 2012-2015, two more stores were opened in 2016.
The total retail area of the acquired stores is 42.5 thousand square meters. m, of which about 40.2 thousand sq. m are owned, and 2.3 thousand sq. m. m - for rent. Kesko's retail business is owned by six legal entities that will be acquired during the transaction, Lenta said in a statement.
Reference
Today, Kesko, according to the company website, operates 11 food stores in Russia under the K-Ruoka brand (in St. Petersburg and the Leningrad region), 13 K-Rauta stores and 19 Intersport sportswear stores. In the summer of 2016, the company's sports division was sold. The transaction amount, according to experts, amounted to 100 million rubles.
According to Kesko, the sale of the grocery chain is due to the desire to focus on business development in Finland. “We will focus on developing food trade in Finland and refuse to trade in Russia, since this business would require significant capital investment,” the company’s press service quotes Kesko President and CEO Mikko Helander as saying.
According to Lenta General Director Jan Dunning, the deal will significantly strengthen the network’s position in St. Petersburg. Once the integration is completed, the stores will operate under the Lenta brand.
The transaction has already been approved by the boards of directors of Lenta and Kesko. If approved by the Federal Antimonopoly Service of Russia, the transaction will be closed on November 30, 2016. The deal will be financed from the company’s own funds, as well as through long-term credit lines, Lenta’s press service reports.
The fact that negotiations were underway was announced last week, but then Lenta reported that an agreement had not yet been reached. According to market participants, negotiations have been ongoing since the spring of 2016. “One of the reasons is K-Ruoka’s too strict policy towards suppliers,” one of the market participants told RBC St. Petersburg. “The network offered conditions (including entrance bonuses) that not everyone was ready for.”
According to co-owner of the Real trading house Alexander Myshinsky, Kesko chose the wrong moment to enter the Russian market. “K-Ruoka entered Russia after Prisma, and under the conditions of the devaluation of the ruble and the embargo, they simply had nothing to offer to a buyer who was accustomed to Prisma,” says A. Myshinsky. — Most likely, the owners decided to exit the unprofitable business in Russia. Kesko has already sold Intersport, now K-rauta is inferior to Leroy Merlin, slowly reducing its presence in Russia.”
It is curious that a few hours before the announcement of negotiations between Lenta and Kesko Oyj, the share price of the Russian retailer jumped by almost a quarter. By 12:10 Moscow time on October 21, the price of the paper reached 606.5 rubles, which is 24% higher than the closing price of trading on October 20, while official information the proposed purchase of Kesko appeared on the disclosure site only at 17:25. At a price of 606.5 rubles. per share, the company's capitalization on the Moscow Exchange added 57.6 billion rubles from the previous day. and reached 295.1 billion.
Subsequently, Lenta’s quotes adjusted: trading on October 21 closed at 488 rubles. per share. It is worth noting that over the following days the price continued to decline and on the day of the transaction, October 26, it dropped to 472.5 rubles by 16:00 Moscow time.
Reference
Sales of the hypermarket chain K-Ruoka (part of the Finnish concern Kesko), according to the company's reporting, for the first half of 2016 were by 8.5% compared to the same period last year - up to 54 million euros, an increase in rubles - by 32.4 %. Kesko's total sales increased by 7.2% to 4.6 billion euros.
Food retailer Lenta increased revenue by 20.2% in the third quarter of 2016 compared to the same period last year - to RUB 75.4 billion. The growth of the indicator was influenced by the emergence of new stores in the network and an increase in sales at pre-existing locations, the company noted in a statement.
In the third quarter of 2016, Lenta opened eight hypermarkets; as of September 30, the total retail area of Lenta amounted to 963 thousand sq. m - 22.3% more than a year ago. In total, the retailer intends to open 40 new hypermarkets this year.