Description

Description:

Brazilian retailer trading for negative value. 

Overview

• Grupo Pão de Açúcar (GPA) is a consortium of (a) a Brazilian supermarket retailer, (b) a Latin American supermarket retailer, and (c) a 34.2% stake in French ecommerce provider Cnova. 

• GPA recently divested its least attractive asset (Brazilian hypermarkets) for R$5.2B–or 84% of GPA’s market cap. 

• GPA is transitioning to become the leading food ecommerce platform in Brazil. 

• Core GPA grades for negative value despite being a premier supermarket provider in Brazil. 

Summary 

One year ago, GPA (trades ADR as CBD and in Brazil as PCAR3) had 5 key assets: (a) Core GPA - its core Brazilian supermarket brands, (b) Assaí – its cash and carry offering, (c) Hiper – its Brazilian Hypermarket brand, (d) Éxito – its Latin America (ex-Brazil) store brand, and (e) Cnova - its 34% ownership stake in ecommerce provider Cdiscount. Most analysts considered Assaí its “crown jewel.” Cash and carry (think lower end Costco) has seen tremendous growth in Brazil due to economic difficulties over the past decade. Assaí caters to a lower economic demographic and has gained market share from hypermarkets, warehouses, and other lower cost offerings. Hypermarkets (think Fred Meyer), conversely, have been a segment that has been hit hard over the last decade and has been losing market share to cash and carry and other warehouse offerings. In Brazil, stores either need to be (a) convenient or (b) super cheap–hypermarkets are neither. 

In September 2020, GPA announced its intention to spinoff Assaí, and effectuated the spinoff in March 2021. Assaí was generally considered the “good business” and GPA the “bad business” in large part because of its Hiper brand. Since the spin, GPA has traded in the 0.45 EV/sales range v. 0.70 EV/sales for Assaí. 

On October 15, 2021, GPA announced that it was exiting hypermarkets and had agreed with Assaí to sell 71 of its 103 hypermarkets for R$5.2B. This transaction was pitched as a win for both companies (and there are certainly benefits to Assaí particularly in light of moves by Carrefour), but it is a homerun for GPA. GPA was trading around 0.4 EV/sales at the time, and hypermarkets were universally considered the worst part of GPA. Despite that, GPA was able to monetize its worst asset at an effective multiple of 0.6x EV/Sales.

GPA’s non-core assets Éxito and Cnova are both publicly traded–though with limited float. Éxito trades on the Bolsa de Valores Colombia (BVC) under the ticker EXITO, and Cnova trades on the Nasdaq under CNV. The market cap of EXITO is R$7.6B and GPA’s 34.2% interest in CNV is R$4B. Thus, combined GPA’s non-core value is over R$11.6B. Today, GPA has an EV of under R$10B (excluding long-term lease liabilities). Stated differently, core GPA trades for negative R$1.6B (even without adding in the sale of Hiper). GPA intends to use the Hiper proceeds to fuel its growth strategy and digital buildout while also deleveraging.  

Sum of the Parts 

On a SOTP analysis, GPA is super cheap. The key components of the SOTP are: (1) monetization of Hiper; (2) 97% ownership of Éxito, (3) 34.2% interest in Cnova, and (4) Core GPA. 

1. Monetization of Hiper - $4.0B 

This is the clearest aspect of the SOTP analysis as the transaction for R$5.2B has already been announced and approved. The amount will be paid in installments from December 2021 - 2024 with interest of CDI + 1.2%. Value of $4.0B to account for taxes. 

2. Grupo Éxito - $5.6B

Éxito is a collection of stores throughout Latin America with a primary presence in Columbia (499 stores) and smaller presences in Uruguay (91 stores) and Argentina (25 stores). The primary banners are Éxito (hypermarkets, supermarkets, and express stores), Carulla (supermarkets and express stores), Super Inter and Surimax (low-cost supermarkets), and Surtimayorista (cash and carry). For the TTM, Éxito generated R$23.2B in net revenue, R$5.6B in gross profit, and R$2B in AEBITDA. Éxito has very limited float, but the market value seems directionally right–it trades for 0.5x trailing sales and 8.7x trailing EBITDA–consistent with peers. GPA’s 96.57% interest in Éxito is worth around R$7.3B. 

There have been discussions of GPA spinning off Éxito as it did with Assaí, which would be the simplest and most tax efficient way to monetize Éxito. But spinning Éxito is challenging because it would require spinning a Latin American grocer ex Brazil to primarily Brazilian shareholders when the company already trades in Colombia. The valuation I have placed on Éxito for the SOTP discounts the value by 24% to account for taxes in the event of a sale. 

Spinning/selling Éxito is not central to the thesis and there are certainly some synergies that could be gained by keeping Éxito and GPA together–for example in building out ecommerce platforms and through white labeling, but a $5.6B valuation is a reasonably conservative valuation for a SOTP perspective.        

3. Cnova - R$2.5B

GPA owns 34.2% of Cnova, whose sole asset is Cdiscount–a French ecommerce website attempting to be the Amazon of France. GPA’s ownership interest in Cnova has a convoluted history, but it is largely due to the transfer of interests among Groupe Casino interests. Cnova is publicly traded, and has a market cap of R$12B–making Cnova’s 34.2% interest worth R$4.0B. Cnova trades at 1.18x trailing revenues and 24.5x trailing EBITDA. Those don’t seem outrageous for an ecommerce company, but I don’t have a strong opinion of Cdiscount other than it would be great if GPA could monetize it. 

GPA does have a preference option for any monetization event of Cnova. Under an agreement with Cnova and Casino, GPA gets a board member at Cnova and more importantly “will have priority over Casino to sell its shares in a public offering for the distribution of shares with respect to 90% of the total shares to be offered in the secondary offering.” (2020 20-F). Additionally, GPA has the right to sell all of its shares in any change in control. Recently, it looked like GPA may be able to monetize its interest in Cnova when Casino announced plans to raise 300M euros–but those plans ultimately fell through. https://www.nasdaq.com/articles/casinos-ecommerce-arm-cnova-defers-capital-increase-and-drops-earlier-guidance-2021-10-08. Ideally, GPA should be able to get some value out of Cnova, but it is unclear when or how much.  

The SOTP value is calculated by taking GPA’s 34.2% interest in the public valuation of Cnova (R$12.1B) for a total of R$4.1B, and assuming that GPA can only capture 80% of the valuation of its stake in Cnova (R$3.3B), and discounting the value for taxes of 24% for a total valuation of R$2.5B.  

4. Core GPA - R$10B

Core GPA is a Brazilian supermarket chain with several banners catering to different markets. The banners include: 

Pão de Açúcar is the flagship supermarket brand and caters to the A-B class. Think Publix/Whole Foods. Proximity stores are smaller stores with a similar upmarket offering. Think smaller, neighborhood Publix. Mercado Extra/Compre Bem are supermarkets focused more on the middle-class–Think lower end Kroger/Aldi. Margins are commensurate with the offerings with Pão de Açúcar having the highest margins (low double digit), Proximity having “high single digit,” and Mercado Extra/Compre Bem margins commensurate with historical GPA margins (7+%). The following chart presents a breakdown by store of revenue/store and corresponding margin contribution: 

In addition to selling 73 hypermarkets, GPA is converting 28 of the hypermarkets to supermarkets–14 Pão de Açúcar and 14 Mercado Extra. GPA anticipates 6 months of remodeling and 6 month ramp up for full production at each of those locations.  GPA is starting a new banner “Pão de Açúcar Fresh” which is a smaller Proximity-type offering focusing on fresh foods. I haven’t modeled anything from those stores. From 2022-2024, GPA plans to materially increase its Pão de Açúcar and Proximity banners by 100 stores each. I have modeled 2022 with just taking into account the 28 hypermarket transitions and 13 Proximity store additions. Here are my 2022 going concern operations for GPA. 

Here are the valuations for GPA’s primary competitors: 

Even using the lowest multiple of Atacadão, gets a valuation between R$10 - 12B for Core GPA. 

This is more than the company is trading for currently but without including the R$5.2B from the sale of Hiper, the entirety of the Éxito operations (consisting of 615 stores and generating similar revenue and profitability as Core GPA), and Cnova. 

GPA also offers an attractive ecommerce bet. GPA had been investing heavily in ecommerce and grocery delivery prior to the pandemic and has benefitted from COVID. GPA has used its broad distribution of stores and first-mover advantage to become the premier food delivery platform in Brazil. As GPA continues to build out stores (200 over the next 3 years), it will continue to exert network effects and further grow its best-in-class status in last mile distribution. In Q321, GPA grew online sales over 46% y/o/y to R$475M for the quarter–which represents 9.3% of GPA’s overall food sales. 

GPA’s broad distribution of stores and technological investments have materially improved fulfillment turn times. 33% of sales are now “next hour” delivery, 41% additional orders are fulfilled the same day, and the remaining 27% are fulfilled the next day–up from 2/50/48 in 2019. 

GPA has also developed Marketplace, which allows retailers to partner with GPA (or Éxito) for ecommerce and fulfillment. GPA has been effective in developing partners for the delivery of grocery-accessory products like wines, beers, personal care items, and home care items. Examples of partners include Nespresso, Coty, and Emporio de Cerveja. Partners seem to be pleased with Marketplace fulfillment and benefit from the ability to get product into customers hands within an hour. Marketplace has grown faster at Éxito than GPA, but should continue to gain share in both brands.

Total SOTP Analysis

Taking each of the four components yields a SOTP of R$22.1B. GPA has already monetized Hiper and that amount will flow through the balance sheet to fund additional growth and pay down debt. Ideally, Cnova will be able to monetize Cnova. If GPA can monetize Cnova, there should be less need for a conglomerate discount as GPA and Éxito would be well paired and should be able to be fairly valued. But even applying a conglomerate discount of 20% yields a SOTP value of R$17.7B. 

Here is the current cap table for GPA: 

Accordingly, GPA trades at about 51% of its conservative SOTP and has the potential to monetize those various parts in the near to intermediate term. 

Why Does The Opportunity Exist/ Bear Thesis?

The opportunity exists because of a culmination of macro, transitory, and ownership reasons. At a macro level, Brazil has been an economic disaster, has great uncertainty, faces fears of hyperinflation, and an uncertain upcoming presidential election. It seems that most of these macro fears are priced in, but if Brazilians can’t afford groceries, that would be bad for GPA. 

Transitorily, GPA’s balance sheet and earnings do not reflect the Hypermarket divestiture, and GPA will likely have a poor next couple of quarters as it transitions the Hiper stores. I would not be shocked if the stock trades down over the next few months during the next quarter or two as the Hiper transition flows through. 

Groupe Casino is the other headwind. Casino has been involved with GPA and Éxito since 1999 when it acquired a 25% stake in each. In 2007 and 2012, Casino became the majority shareholder of Éxito and GPA, respectively. Casino has not been the greatest steward of assets (including arguments from Assaí shareholders that they got the raw end of the Hiper deal, and as evidenced by the fact that GPA owns 34% of Cnova, which makes little sense). In 2019, Casino facilitated the transfer of Éxito to GPA including the purchase by GPA of Casino’s 55.3% ownership interest in Éxito. The deal was set up in large part to simplify Casino’s Latin American operations. GPA paid R$9.5B for Éxito–funded primarily through debt. There are some synergies associated with GPA’s acquisition, but the acquisition was unlikely something GPA would have acquired were it not for Casino’s involvement in both enterprises. As part of the transaction, however, GPA purchased Éxito’s interest in GPA and reduced effective ownership of GPA. Today, Casino owns 41% of GPA.  

If Casino got desperate, there is some possibility that Casino could divest its ownership interest in GPA, which would create a significant overhang on the stock. It seems unlikely that Casino would do this given its long-term ownership, and as evidenced by the monetization of tassets over the past several years including the sale of GPA’s former 36% ownership interest in Via Varejo (another Brazilian retailer), the spin of Assaí, the sale of Hiper, and recent discussions to monetize Cnova and Éxito. 

With that said, there is a massive margin of safety with GPA, and Casino has been actively working to monetize its Latin American assets–including an earlier sale of its interest in Via Varejo, the spin of Assaí, discussions of monetizing Cnova, and discussions of some form of divestiture of Éxito. Thus, I believe this headwind (which is mentioned by many as the greatest headwind) is overblown. 

Catalyst

Catalysts

• Negative EV

• Monetization of Sums of the Parts 

• Cleanup of Balance Sheet/Income Statement after Divestiture

• Additional divestitures