(Reuters) – U.S. retail giant Wal-Mart (WMT.N) is in preliminary talks to acquire Russian retailer Lenta after years of trying to enter the fast-growing market, sources with first hand knowledge of the matter said.
Deals | Russia
“It is fair to say that at this point there has been some information exchanges and some discussions but the talks are still pretty informal,” one financial source said on Wednesday.
Founded in 1993 as a small “cash and carry” warehouse in St Petersburg serving primarily cafes and small retailers, Lenta has become a major hypermarket chain in Russia with 36 stores.
Wal-Mart, which is looking for new growth markets, has been trying to penetrate Russia for several years. In Moscow, it has a 12-strong team working on its Russian market entry strategy, the source added.
The same source said Wal-Mart would not be interested in buying just a stake in Lenta but the whole company. “If they (Wal-Mart) did a deal, they would buy the whole thing,” he said.
Lenta and Wal-Mart declined to comment on Wednesday.
Asked about the timing of any deal, the source said: “There is genuine interest but there is nothing imminent… Talks have been going on since the beginning of the year.”
Credit Suisse advises Wal-Mart in Russia, the source said, adding that formal proceedings had not begun and management of both companies had not yet met.
A second source close to the matter said negotiations between the two companies were “very preliminary” and warned any deal could take months.
If Wal-Mart acquired Lenta now, it would pick up the Russian retailer in a recovering market but the longer the talks take, the more expensive the Russian company would potentially become.
Russian retail sales dropped 5.5 percent in 2009 in rouble terms and in the first quarter of this year, they rose 1.3 percent to 3.6 trillion roubles.
Lenta’s comparable sales in the first quarter rose 17.8 percent with revenues in parts of Siberia, the Urals and southern Russia up more sharply than expected.
In 2009, Lenta made sales of 55.6 billion roubles ($1.86 billion) excluding VAT, up 9 percent against 2008 in rouble terms.
According to Thomson Reuters Starmine, Russian retail sector peer X5 Retail (PJPq.L) trades on 0.7 times forward full-year revenues while Magnit (MGNT.MM) is on 0.9 times forward full-year sales.
Lenta is jointly owned by U.S. businessman August Meyer who has a stake of 36 percent, private equity firm TPG with a holding of just over 35 percent and the European Bank for Reconstruction and Development which owns around 11 percent.
Alexey Krivoshapko, director of Prosperity Capital, estimates Lenta’s enterprise value at around $1.7-$2 billion. Excluding debt estimated at $450 million, the equity would be worth about $1.2 billion – $1.4 billion, he said.
But last October, when the retail market was depressed, TPG bought a 35.4 percent stake just for about $115 mln — valuing the equity at four times less or $325 million.
Other analysts such as Alexei Pinkov at AC Capital in Moscow estimate Lenta’s equity to be worth around $500-$600 million.
TOUGH TO CRACK
International retailers have adopted mixed attitudes toward Russia which, with a population of around 140 million and a low level of retail penetration, offers strong growth prospects but it has also been hit hard by the global economic downturn.
Major foreign players include France’s Auchan AUCH.UL and Germany’s Metro (MEOG.DE), while France’s Carrefour (CARR.PA) abandoned a brief foray into the market last year and Britain’s Tesco (TSCO.L) has shown little interest in entering.
Metro said last month that price competition had picked up in Russia as domestic players like X5 Retail, Magnit and Dixy (DIXY.MM) battle to attract cash-strapped shoppers. Any Wal-Mart entry into the market, with its focus on low prices, would likely add to that pressure.
Walmart shares were up just under 1 percent at $52.45 by 1616 GMT.
(Additional reporting by Mark Potter in London and Quentin Webb in London; editing by Elaine Hardcastle)