CARREFOUR, a giant French retailer, has been through a rough patch. It has tried for several years to revive its hypermarket business in France, without much success. Blue Capital, its unhappy main shareholder, has relentlessly pushed the sale of assets to prop up Carrefour’s sagging share price. Before the retailer’s recent annual general meeting, rumours circulated that Lars Olofsson, its chief executive, was on his way out.
After a tumultuous meeting Mr Olofsson kept his job. A week later, on June 28th, Carrefour said that it had received an offer to merge its Brazilian operations with those of Companhia Brasileira de Distribuição (CBD), the owner of Pão de Açúcar (“sugar loaf”), a fancy Brazilian chain.
Under the proposal, CBD and Carrefour’s Brazilian arm will merge into Gama, a holding company capitalised by the (state-owned) Brazilian National Development Bank (BNDES). This would receive an investment of €2 billion ($2.9 billion) and a loan of €500m from BNDES. Carrefour would have a 50% stake in the new entity.
The deal has obvious attractions. The Brazilian market is fragmented. CBD is the biggest retailer; Carrefour is number two. The new company would have combined sales of perhaps 69 billion reais ($43 billion). It would have a 21% share of the world’s third-largest grocery market after America and China. Brazil’s economy is hot: it grew by 7.5% last year. Its population is young. Unlike certain other emerging markets, it is a stable democracy.
Alas for Carrefour, there is a snag. The other big owner of CBD is Casino, another French firm and Carrefour’s archrival. Casino owns 37% of the company and has the option to take a majority of voting rights next year under a previous agreement. Since it emerged last month that Abilio Diniz, the chairman of CBD, had contacted Carrefour to discuss a possible tie-up, Casino and Mr Diniz have been at daggers drawn. Casino claims that the negotiations between Mr Diniz and Carrefour were illegal. Neither has responded.
Casino feels betrayed. It was about to take control of the biggest retailer in one of the world’s fizziest markets. Instead, it may end up as a marginal shareholder. Gama’s bylaws stipulate that no one may have more than 15% of the voting rights in the proposed new company.
Casino is likely to take its grievances before Brazil’s unpredictable courts. That could mean a long and costly battle. And even if Casino wins, it will have poisoned the relationship with its co-proprietors and distracted everyone from the task of selling cubed pineapples and imported cheese to affluent Brazilians.
Another possibility is that Walmart, the third-biggest retailer in Brazil, might bid for Carrefour’s Brazilian assets. That would weaken CBD, says Christopher Hogbin at Bernstein Research. Walmart is investing heavily in Brazil, opening more than 100 shops there last year.
The deal is likely to be scrutinised closely by Cade, Brazil’s antitrust authority, which is becoming stricter about the creation of giants with pricing power. Carrefour and Gama say they are preparing proposals for Cade. These may include divesting themselves of some stores in São Paulo, where the two chains are dominant.
But the deal has one great advantage: it is supported by the
government via the BNDES. Brazilian policymakers are worried about
Brazil becoming mainly an exporter of commodities. So they are keen to
create national champions in other sectors, even if they are partly
controlled by foreigners. Carrefour could bring valuable skills to
Brazil, and perhaps help the new venture gain access to markets in other
countries. When you use your loaf, the rewards can be sweet.