Jun 28, 2011
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Carrefour steps up Brazil turf war with Casino

Jun 28, 2011

PARIS (Reuters) - France's Carrefour (CARR.PA) could snatch control of Brazil's top retailer, Grupo Pao de Acucar, from arch-rival Casino (CASP.PA) in a bold move to broaden its footprint in a top emerging market.

The talks on a merger between Carrefour, which has been struggling with a stagnant domestic market, and Pao de Acucar (PCAR4.SA), were initiated by the Brazilian supermarket chain's chairman and would count on financial backing from government development bank BNDES.

But Casino is unlikely to part with its prized Brazilian assets without putting up a fierce fight and analysts braced themselves for months of legal wranglings.

"It's unlikely this deal will happen any time soon because for the deal to happen, GPA shareholders need to approve it. It's unlikely Casino will want to sell the business. It's their prized asset. Given they have co-control, they should be able to block it." Bernstein analyst Christopher Hogbin said.

Another analyst who asked to remain anonymous, however, said the fact that the deal had the support of the Brazilian government might make it tough for Casino to block.

"Casino will enter the fight with a serious handicap," the Paris-based analyst said.

A merger of Carrefour's existing Brazilian stores with Pao de Acucar would create the country's retailer with estimated 2011 pro-forma sales of more than 30 billion euros ($43 billion) and a network of 2,386 stores.

The proposal came from Gama, a company wholly-owned by an investment fund managed by BTG Pactual, one of Brazil's leading financial groups, and capitalized by the Brazilian National Development Bank (BNDES).

Under the deal, Gama would become Carrefour's reference shareholder alongside Blue Capital, an alliance of luxury billionaire Bernard Arnault and U.S. property specialist Colony Capital.


The offer ends weeks of suspense over Carrefour's plans in Brazil, its second-largest market after France, and by 1201 GMT (8:01 a.m. EDT), Carrefour shares gained 2.3 percent while Casino shares were off 5.4 percent.

"Strategically, it actually does look like a pretty good deal. It's the first bit of good news we've heard from Carrefour for a while," said Bernstein analyst Christopher Hogbin.

Carrefour, weakened by three profit warnings since autumn, is betting on fast-growing emerging markets such as Brazil to help offset weak sales at home.

A merger of Pao de Acucar and Carrefour's local unit could help reduce fragmentation in fast-growing Brazil's $230 billion retail industry, 60 percent of which is dominated by the top 10 players, and would give the combined company 28 percent market share, more than double that of Wal-Mart Stores Inc. (WMT.N).

Brazil's population is three times that of France, and its $2.1 trillion economy is 80 percent as big. Growing at 5 percent a year, Brazil could top France as the world's No. 5 economy in less than a decade.

Analysts see strategic benefits for Carrefour from merging two Brazilian retailers, which would command 21 percent of the Brazilian food retail sector, and capture synergies estimated by Gama at 700 million euros per year.


The proposal from Gama comes as Casino has signaled its eagerness to consolidate its grip on Grupo Pao de Acucar, which it jointly owns with the Diniz Group.

Casino and Brazilian businessman Abilio Diniz, its partner in Brazil's top retailer, Grupo Pao de Acucar, have been at odds since Diniz, also GPA's chairman, contacted Carrefour without permission to discuss a possible tie-up.

Diniz's move led Casino to file for international arbitration against the Diniz group last month, saying discussions with Carrefour would flout the terms of the partnership.

In a Tuesday statement, Casino blasted the Gama's proposal as "a long-standing illegal planned financial transaction between Carrefour and Abilio Diniz"

Gama however told Reuters it had no ties to Diniz.

Casino said it would examine in the next few days how to best defend the corporate interests of GPA and its shareholders.

"Casino recalls that it has the authority to oppose this project according to the existing agreements and that no negotiations regarding the future of CBD (Grupo de Acucar) can be conducted without his consent and without prior discussion of this project at the Board of Directors of Wilkes, the holding company controlling CBD," it said in a statement.

Casino and the Diniz group have 50-50 percent interest in Wilkes, the holding company controlling 66 percent of the voting rights of GPA.

Under the terms of its offer to Carrefour, Gama would become a key shareholder of Carrefour with an 11.7 percent stake and could buy extra shares representing up to 6 percent of Carrefour's capital.

Gama would enter into a shareholders' agreement and act in concert with Blue Capital, Colony Blue Investor, and Groupe Arnault, which jointly own 14.1 percent of Carrefour's share capital and 20.2 percent of voting rights.

Gama would benefit from representation rights on Carrefour's board with two seats, including the vice-chairmanship, which is currently held by Sebastien Bazin, the head of Colony Europe.

Carrefour's board of directors has been informed of the terms of this proposal and will review it in the coming days, the company said in a statement.

($1=0.698 euros)

(Additional reporting by Caroline Jacobs in Paris and Mark Potter in London; Editing by Mike Nesbit)

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