Chilean retailers are at it again: buying in Brazil.
This time, it’s the turn of Falabella, the country’s No. 3 retailer. It is spending $189m to buy a 50.1 per cent stake in Construdecor, which operates 57 DICICO DIY (home improvement) stores in the state of São Paulo, with sales last year of $385m.
Will this be an improvement for Falabella, which already operates the Sodimac home improvement chain in Brazil? Looks like it, analysts say.
The price looks right – Bloomberg noted it was “cheaper than Falabella’s own price-to-sales ratio of 2.3 times, according to Banchile-Citi, the joint research department of Banco de Chile and Citigroup Inc” – and the fit seem to have gone down well in the market. Falabella’s shares enjoyed their biggest rise in a week.
As BCI, a Chilean bank, said in a research note:
At first sight, and considering the multiple paid, we think the acquisition is positive to the extent that it will enable the company to move into a fifth market, which as well as having a large population stands out for having a low penetration of the retail business.
An easy bolt-on to the business then, then, not the kind of acquisition that’s as hard to read as some DIY instructions? Well possily, but then, Brazil is for the brave… As BCI added:
Brazil is a major challenge, both because of its culture and regulation and its current economic situation, so the time it will take to export some new format will also be key.
The deal works out at about 1 per cent of Falabella’s market cap and 25 per cent of its investment plan for the current year, say Chile’s Inversiones Security analysts.
Dow Jones quoted Credit Suisse as calling it a:
… much needed step in Falabella’s regional strategy. We have argued in the past that Falabella’s nearly 70% exposure to Chile (in terms of Ebitda contribution) put it at an unfavorable position relative to other large retailers in the region. Cencosud, Exito, and even Walmex, have all been more active on the M&A (merger and acquisition) front over the last 2-3 years, and they all have exposure to markets with significantly lower penetration of formal retail/consumer credit visa vis Chile.
Ah but, it added:
We are not overly optimistic about this early move into the home improvement market in Brazil. Given the relatively low contribution to revenues [it estimates the deal will add 1.6 per cent to Falabella revenues], we think this can hardly be seen as a transformational acquisition for Falabella
Still, Brazil’s DIY market is nearly six times bigger than the Chilean one. Sounds like a nifty little project.
Brazil: Chile’s new investment backyard, beyondbrics
Chile: Retailers extend grip across the continent, FT
Chile Inc wants to ride wave of cheap money too, beyondbrics
Latin banks flex their muscles as US and European lenders head home, beyondbrics