Mordashev's Severgroup completes Lenta acquisition despite Magnit bid

Mordashev's Severgroup completes Lenta acquisition despite Magnit bid
Russian steel tycoon Alexei Mordashov completed the acquisition of 41.9% of Russian retailer Lenta and will buy out minority shareholders
By bne IntelliNews May 2, 2019

Severgroup of steel tycoon Alexei Mordashov completed the acquisition of 41.9% of Russian retailer Lenta and is expected to make a binding buyout offer to minority shareholders, which was part of the deal, Lenta reported to the London Stock Exchange.

The acquisition by Severgroup was carried through despite minority shareholders questioning the deal and urging to study a competing offer from rival retailer Magnit, which proposed a slightly higher share price and could bring retail industry expertise that Severgroup doesn't have.

Under a binding agreement announced on April 1, Lenta's main shareholders TPG and the European Bank for Reconstruction and Development (EBRD) were to sell their 34.44% and 7.47% stakes in Lenta respectively, to Severgroup for $3.60 per GDR. The total amount of the deal stood at $729mn and the retailer is valued at $1.75mn.

Should all the remaining minority shareholders claim the buyout offer, Severgroup would have to spend an additional $1bn. "Our goal is to bring Lenta to a position of an uncontested leader in the sector in terms of client loyalty and unique proposal," Alexei Mordashov commented on the deal in the press release.

The minority shareholders that urged to look closer into the Magnit deal reportedly included Prosperity Capital, Aberdeen Standard Investments, Bestinver and a group of unnamed private investors.

As traditional retailers are pushing against structural barriers to growth, declining valuations could start a wave of M&As in the sector. Most recent reports claim that another second-tier retailer O'key is reportedly eyed by Yandex.Market online marketplace, a joint venture between Russia’s largest bank Sberbank and most valuable digital company Yandex.

However, the CEO of Magnit and the former CEO of Lenta Jan Dunning told Vedomosti daily commenting on the Lenta acquisition on April 30 that more of such large deals that change the landscape of the sector are not to be expected any time soon. Magnit will continue to look into small, regional players that fit the formats of Russia's second-largest retailer, Dunning said. 

Magnit itself has been struggling to keep up since it lost market leadership to rival X5 Group. The company reported a drop in net IFRS income of 52% year-on-year to RUB3.54bn ($54mn) in 1Q19, with Ebitda decline of 6% y/y and Ebitda margin decline by 110bp to 6%.

"Magnit reported weak 1Q19 IFRS and trading update, significantly missing BCSe and market expectations," BCS Global Markets commented on April 30. Company's revenue in the reporting quarter came in line with market expectations, rising 10% y/y, mainly driven by the store expansion program and growth in like-for-like (LFL) sales by 0.6% y/y in 1Q19. 

In turn, X5 Group in 1Q19 posted “very strong results, beating expectations on EBITDA by 9% and net income by 21%. EBITDA margin reached solid 7.3% versus expected 6.7% - strong positive,” BCS GM commented on April 25.

The explosive growth of Russia’s supermarket chains has come to an end as organised retail starts to run up against structural constraints. The leading chains have switched from expansion to grab more market share to improving profitability and have even begun to close some of their more unprofitable stores.