[FINAL UPDATE] CP Group wins bid for TESCO Lotus in one of Thailand’s largest-ever acquisitions

Thailand’s Charoen Pokphand Group announced on Monday that it will acquire TESCO’s business in Thailand and Malaysia for $10.6 billion.

The deal, first called by Thai Enquirer Monday morning, would be one of the, if not the biggest ever acquisition in Thailand, and will see 1,967 stores in Thailand and 74 stores in Malaysia come back into the CP fold.

CP had founded the chain before it sold out to TESCO in 1999 for $188 million after the Asian financial crisis.

The Malaysian branches were valued at $3 billion while the remaining was for the Thai operations.

The listed entries of CP Group namely CP All Plc and Charoen Pokphand Food Plc (CPF) will take the lead in acquiring the stakes.

The board of directors of CP All Plc today also released a statement to the Stock Exchange of Thailand (SET) that it will invest up to 40% of TESCO Lotus Thailand which in turn owns 99.99% in Ek-Chai Distribution Systems Co. Ltd., the operator of TESCO Lotus’ branches across Thailand.

Charoen Pokphand Foods Plc’s board also met to announce that it would acquire up to 20% of TESCO Asia Group at a cost of $1.5 billion. TESCO Asia is the unit that operates the Malaysian branches of TESCO.

The 2 listed entities will hold a combined stake of 60%.

Maria Lapiz, Managing Director at Maybank Kim Eng Securities said that to her it looks like CP group will assume full ownership of Tesco Lotus Thailand and Malaysia. She added that the remaining shareholder is likely to the holding company CP Group Co Ltd.

The acquisition cost of $7.5 billion or about 239.9 billion baht is likely to be debt-funded.

At the end of FY19 CPF had total debt of  333.9 billion baht and earnings before interest, tax, depreciation and amortization (EBITDA) of 44.7 billion baht. With its EBITDA volatile, CPF is more leveraged than CPALL, Lapiz said in a statement to clients.

At the end of 2019, CPALL had 145.7 billion baht debt and EBITDA (consolidated basis) of 44.5 billion baht.

“If the deal goes through, it would be debt-funded so taking on possibly up to 96 billion baht. Tesco Thailand is profitable. As of FY ending Feb-19, its revenues reached 184 billion baht, and net profit of 15.5 billion baht, net profit margin (NPM) is about 8.4% just about the same level of MAKRO’s NPM. Assuming CPALL funding cost at 3%, the additional interest burden is 2.88 billion baht while its equity income would be about 6.2 billion baht on the Tesco Thailand operations alone,” she said.

She added that this acquisition will put CP Group at the top of the Thai retailer’s food chain (CPALL, MAKRO, Tesco-Lotus will have combined revs of close to THB695b) with a focus on mass retail. She notes that it was not the same market as CRC, which is more of a high-end retailer.

Lapiz added that the spillover effects in her view were that CPF will likely benefit from this transaction, indirectly. Recalling that before CPALL acquired MAKRO, MAKRO sales of CPF products in its stores were only 2 billion baht and this rose to 10 billion baht.

Bringing in Tesco stores into the fold could give CPF an even bigger market share.

With the debt load of CPALL rising, there is a higher chance that it will sell some of its stakes at MAKRO to generate cash. (Note that MAKRO is in breach of SET’s minimum free float limit at 15%, now its float is just 7%.)

Largest in Asia

The acquisition by CP Group has been tagged as the largest merger & acquisition deal in Asia this year, according to the Financial Times’ John Reed.

The deal’s size was bigger than expected because 3 of the most wealthy families in Thailand vying for the asset.

The 3 families were:

CP Group owned by the Chearavanont family

TCC Group owned by the Sirivadhanabhakdi family

Central Group owned by the Chirathivat family

Anti Trust Issues

CP Group already owns CP All Plc, a 622 billion baht market capitalized company.

CP All is the operator of 7-Eleven convenience stores across Thailand. According to the company’s website, it operates 10,268 7-Eleven stores across Thailand with 44% of these being in Bangkok and the rest spread across the country.

CP All also owns Siam Makro Plc, the wholesaler that targets mom & pop shop owners with 123 branches in Thailand and 1 branch in Cambodia.

CP Group has also started its operations in India with Makro style wholesale called LOTS.

CP Group had made a record offer of $6.6 billion to buy back the operations of Siam Makro in April 2013. At that time the company operated 57 Makro stores and 5 Siam Frozen stores. The price offered by CP Group to buy back Makro was at that time considered to be ‘outrageous’ and overpriced.

Analysts have said that concerns anti-trust concerns over CP’s bid were overblown as the anti-trust laws in Thailand are not that strict and that the penalty is a mere 0.5% of the deal which in this case could be around $50 million.

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