Why did VTB buy 29.1% of the largest retail network.
The actual transfer of the largest retail chain “Magnit” under the control of VTB was the main sensation of the investment forum in Sochi. RBC watched the reaction of the market, the emotions of the participants in the transaction and understood the reasons for the decision.
Deal with a discount
The founder and the largest shareholder of the second-largest chain of stores “Magnit” Sergei Galitsky sold VTB 29.1% stake in the company. The parties signed an agreement on the investment forum in Sochi.
The deal amounted to about 138 billion rubles: the state bank valued one share of Magnit in nearly 4661 rubles, which is 4% lower than the closing price on Thursday, February 15. At Galitsky, who created the company 25 years ago and all this time was its leader, there will be 3% of shares.
It was clear that the decision to sell the company was given to Galitsky uneasily. Those present at the signing noted that in the first few seconds he was trying not to cry, but when he started talking, he immediately asked for water. Galitsky spoke slowly, in short sentences, as if he were thinking about every word: “For 25 years I headed the company. This is a fairly long period. And I think that it’s time to change something in my life, because, I think it was a good time. In a nutshell: I think that this difficult decision for me was due to the fact that this is too long a process. After all, I founded this company, but time goes by, nothing lasts forever. ”
The new CEO of the company on Friday, February 16, the board of directors of “Magnet” appointed Khachatur Pambuhkhan, who previously held the post of financial director and chairman of the board. Since Friday, the board is headed by Aslan Shkhachemukov, director of economic security and organizational issues. An extraordinary meeting of shareholders, at which the board of directors will be re-elected, is scheduled for April 19.
The company itself will remain public, VTB promises. As of June 30, 2017 free float is more than 63.5% of the shares of the retailer. The largest minority shareholder of Magnit, according to Bloomberg on February 16, are the structures of the American Dodge & Cox fund with 6.5%.
None of the shareholders of Magnit has a controlling stake, therefore, in fact, the company “with a slight eye” on minority shareholders is controlled by the one who has a blocking stake, says Timur Nigmatullin, an analyst with the Otkryt Broker company. According to him, now form the structure of the board of directors, appoint top managers, develop strategies, etc. will be for the most part a new shareholder – VTB.
As Galitsky explained the sale
The reason for the deal was that investors do not quite see the future as the founder, explained Galitsky at a press conference. Investors really disappointed in the “Magnet”: over the past year the company’s shares on the Moscow stock have fallen more than twice.
The last two years as a whole were not the most simple for “Magnet”. Following the results of 2016, the company for the first time reduced profits and lost leadership in the market by revenue, losing to X5 Retail Group (it controls Pyaterochka, Perekrestok and Karusel). In 2017, the situation only worsened: the company’s net profit fell by 8.5%. In February 2018, X5 Retail Group beat “Magnit” and on capitalization for the first time in seven years.
Recently, Galitsky did not participate in conference calls with investors. Communication is very important, and the CEO did not participate, including in the road show, paid attention to analysts Credit Suisse. “I focus on efficiency, EBITDA, low debt. The current market needs growth, a number of discoveries, like-for-like [comparable sales] and aggression, “Galitsky explained on Friday, February 16. “I should not stand in the way of this process, and if investors want changes, they should get them.” Galitsky added that he is going to live in Krasnodar and will develop the children’s and youth football and his club “Krasnodar”.
Despite the intentions of Galitsky to please shareholders, the deal with VTB analysts was disappointing.
Following the auction on Friday, February 16, shares of “Magnit” fell by almost 8%, to 4473 rubles. for paper. The company’s capitalization declined by 38.4 billion rubles a day, to 455.8 billion rubles. Depositary receipts on the London Stock Exchange (five receipts are equal to one share) fell by 10%, to $ 17.64 per share.
According to the law “On Joint Stock Companies”, a buyer of more than 30% of the total number of shares should announce redemption to minority shareholders. But VTB buys a slightly smaller stake. Probably, this was done in order not to expose the offer, the analyst of “Uralsib” Konstantin Belov assumes. This is a very negative point, which demonstrates a bad attitude towards investors, Nigmatullin adds.
The quotes are also influenced by the fact that VTB redeems the package with a discount, analysts of Promsvyazbank believe. The fact that the founder of “Magnit” sold already cheapened shares with an additional discount, does not inspire optimism, BCS said in a research note. According to analysts, investors can interpret this as having serious problems with the company, which are unlikely to be resolved in the near future.
The reason for further decline is the very fact of Galitsky’s departure from the management, analysts of Citi believe. The influence of Galitsky’s personality on the company was simply enormous, says Belov. How “Magnet” will develop without his participation is a very complex issue, the expert adds.
Why is it VTB
This is not the first asset of VTB Group in Russian retail trade. VTB Capital has a minority stake in the retailer Lenta. The State Bank entered the capital of the company in 2011, receiving 9%. In subsequent years, VTB gradually reduced its share: in 2015, VTB Capital had only 4% (later the bank did not specify the size of its package).
This time VTB becomes the largest shareholder of one of the leaders of retail trade. VTB Chairman Andrei Kostin stressed that the bank will not be “forever” a shareholder of Magnit. Yury Soloviev recalled that the bank owns investments “two to three years minimum.”
It is possible that VTB may be an inconclusive buyer and in the future, various options are possible – from further sale of the package to M & A transactions, Belov notes.
The motives for the deal are not clear until the end: it is unclear why VTB is “retail banking business”, says Alexander Abramov, head of the Institute for Analysis of Institutes and Financial Markets, IPEE RANHiGS. Moreover, the business of Magnit is not in the best shape, and the incomes of Russian consumers do not grow, the economist points out.
Consumer demand has really decreased significantly since 2014, and according to ACRA, in the next three years the real disposable income of the population will increase by no more than 1% per year, says the director of the corporate ratings group ACRA, Evgeny Obydov. The challenge for retail is the period of low inflation that began in Russia. Low inflation will require even greater growth of operating efficiency from retail chains, and in conditions of positive real rates (the CBR rate minus inflation – RBC), retailers will become significantly more expensive to service their debt obligations, the expert says.
But, on the other hand, the growth driver may be the ongoing consolidation in the industry, from which, of course, the largest players will benefit. “International practice shows that the industry is most efficient in conditions of high consolidation, and in Russia the largest seven players still account for no more than 30% of the market against 70-75% on average in Europe,” the ACRA expert notes.
The state comes to retail
The purchase of VTB 29% of the shares of the private retailer Magnit – from a formal point of view, the expansion of the public sector to the segment of the economy in which the state had not previously participated, RBC Abramov said. “This is the growth of indirect state property in the economy,” he states. Abramov is one of the authors of a recent study by the Center for Strategic Research on the role of the public sector in the Russian economy, and this study showed that trade is one of the most free sectors of the state: only 1.1% of the revenue of this industry is accounted for by the state-owned company, 8% across the economy.
But it is too early to draw conclusions about the state’s desire to increase its presence in retail trade, Obydov said. Representatives of VTB said that on average the horizon of their investment in such non-banking assets is from two to five years, and “VTB can really act as a transit investor,” says Obidov. The financial logic in this is: “the asset looks more than attractive after a decrease in its value by more than 50% from September 2017”.
Potential trading giant
VTB not only received the main share of “Magnit” – the state bank plans to combine the logistics and transport resources of the retailer with the “Post of Russia”. The parties officially announced this at the forum in Sochi, VTB in this agreement has the role of a “core financial institution” for the postal operator and retailer, sources told RBC earlier.
FSUE can increase the points of delivery of parcels at the expense of the network, told RBC general director of the “Mail of Russia” Nikolai Podguzov. In addition, he said, the parties will cooperate in Internet trading: the goods of “Magnet” will be able to deliver couriers of the “Post of Russia”.
The partnership between “Post of Russia” and “Magnit” will create a new major player in the market of trade. Now, the Russian Post manages 42,000 outlets across the country, 2.5 times more than Magnit, which is Russia’s largest retailer.
This alliance can also be added to the hypermarkets of Lenta, in which VTB has a small stake and which can also unite with Magnit, told RBC two sources on the market. The representative of Lenta declined to comment on market rumors. The press service of “Magnit” did not respond to the request.
Authors: Anastasia Demidova, Natalia Novopashina, Ivan Tkachev, Irina Parfentyeva, Evgenia Kuznetsova.
With the participation of: Sofya Savina, Dada Lindell, Alexander Bogachev, Galina Kazakulova.
Original in Russian: RBC Daily