Lenta buys the Finnish chain K-ruoka. What will happen to K-Raut stores after Leroy Merlin purchase
The Federal Antimonopoly Service allowed Lenta to buy the business of the Finnish hypermarket chain K-ruoka, the Vedomosti newspaper writes. The transaction will be closed on November 30, the Lenta representative added. The network will get 10 hypermarkets and one K-ruoka supermarket in St. Petersburg and the Leningrad region and three land. The amount of the transaction is 11 billion rubles.
K-ruoka hypermarkets are open until November 30, and on December 7 they will open under the Lenta sign, two employees of one of the chain's hypermarkets say. On Wednesday, November 23, K-ruoka announced the sale of alcoholic products with a 50% discount. A person who visited one of the chain's hypermarkets that day Leningrad region, said that there was an incredible hype going on there. Customers literally swept goods from the shelves. The same thing happened on Thursday in one of the stores in St. Petersburg, which was visited by a Vedomosti correspondent. Many shelves were half empty, long lines to the cash registers stretched across the entire hall. By evening, in one of the hypermarkets, instead of alcohol, there was lemonade on the shelves. In the last two days of work, on November 29 and 30, discounts on perishable and other products will be announced, an employee of the hypermarket said. A spokesman for K-ruok declined to comment.
Finnish Kesko reduces presence in Russia
In order to transfer K-ruoka alcohol to Lenta, a license for the wholesale trade in alcohol is needed, follows from the answers of lawyers from Kachkin and Partners and the A2 Law Office. But the network does not have one, follows from the data of Rosalkogolregulirovanie. It is possible that the owner of the brand, LLC Kesko Food Rus, did not have time to obtain a new license. The company's talks were announced on October 21. The general term for issuing a new license is 30 days, but it can be extended for another 30 days, says Artem Berlin, a lawyer at the corporate and arbitration practice of Kachkin and Partners. K-ruoka has been steadily reducing purchases from suppliers since the deal was announced, so it has low inventory, one supplier said.
The influx of people in connection with the sale of alcohol stimulates sales of other goods in the hypermarket, says Mikhail Burmistrov, general director of Infoline Analytics. Indeed, many visitors are disappointed when they find out that the store only has discounts on alcohol, but still do not leave.
50% discounts on alcohol mean that the retailer sells it at a loss, says a top manager of a federal retail chain. According to him, the premium for elite alcohol can be 30-35%, maximum 40%, but this is very rare cases. The discount is very serious, agrees the general director of the Center for Research on the Federal and Regional Alcohol Markets Vadim Drobiz. But in some cases, its size may be less due to the minimum retail prices for alcohol, which are set by the state.
Lenta has no obligation to purchase inventory, and this is a standard practice when changing the owner of a retail facility in the FMCG sector, Mikhail Burmistrov, general director of Infoline-analytics, knows. Lenta has a completely different product matrix, so the retailer will refill its hypermarkets, says one of its suppliers. The goods will not be transferred to Lenta from K-ruok, new supply contracts have been concluded with Lenta to the addresses of the Finnish chain stores, Georgy Zhitmarev, commercial director of the Piskarevsky dairy plant, confirms.
As it became known, "", "" plans to acquire a network of Finnish hypermarkets "" in Russia. The chain has 11 stores in St. Petersburg and the Leningrad region (with a total trading area of about 49.2 thousand m2), its turnover under RAS in 2015 amounted to 7.7 billion rubles. According to Infoline, Lenta's share of the food market in St. Petersburg is 13.8%, while K-ruoki's share is 0.7%.
Both sides confirmed the negotiations, and late on Friday evening published information about this on their websites, refusing to comment further. According to market participants, Kesko planned to earn at least 13-14 billion rubles for the K-ruoka network. At the same time, since 2012, the holding has invested 2 times more in the development of the network. However, there were no buyers for such an amount. Experts estimated the amount of the transaction at 11 billion rubles. Today the parties are to announce the reached agreements.
Agile "Tape"
Negotiations with Kesko on the purchase of the K-ruoka network were carried out by many retailers, including "" and "". "But Lenta outbid by offering 20% more than the rest. Kesko really wants to close the deal before the end of the year," says a top manager of one of the hypermarket chains. "The deal will amount to 10-11 billion rubles. Representatives of Lenta are already attending K-ruoka meetings," said a source familiar with the negotiations.
The fact that "K-ruoka" is put up for sale, "DP" wrote in May this year. Market participants indicated that the main reason was network inefficiency. "Of the entire network, only two stores show an increase in comparable revenue, the rest suffer a loss," the former top manager of Kruoka said at the time. It is interesting that Oleg Buyalsky, a former member of the board of directors of Auchan Russia and the operating director of Lenta, developed the network for all 5 years of presence on the Russian market.
According to the CEO of Infoline-Analyst Mikhail, the total accumulated loss of K-ruok as of July 1, 2016 exceeded 6 billion rubles, and net debt - more than 7.5 billion rubles, only interest payments on loans in 2016 would exceed 400 million rubles. “In fact, the deal allows Kesko to exit the Russian business in the FMCG segment with minimal losses, which has been generating a loss of 2 billion rubles for the second year and does not demonstrate the prerequisites for breaking even,” says Mikhail Burmistrov. The expert estimated the amount of the transaction at 11 billion rubles, taking into account hypermarkets operating and under construction, as well as land plots.
General Director of "" Sergey Fedorov believes that the reasons for K-ruoka's exit from the Russian market are primarily political, in addition, counter-sanctions made it impossible to sell the Finnish assortment, and as a result, it became the same as many other retailers.
Nikolai Gabyshev, managing partner of Pollyanna Capital Partners, believes that the Finnish network will be a good acquisition for Lenta, as the company will be able to strengthen its position in St. Petersburg. At the same time, retailers believe that out of 11 objects, only four - on Parashutnaya, Planernaya, Urkhovskaya streets and in Vsevolozhsk (next to Lenta) - are interesting, the rest have a not very good location. Lenta will be able to increase sales in K-ruoka stores, but sooner or later there will be "gannibalization" between stores within Lenta itself in St. Petersburg, since it already has a lot of them.
As for another Russian business of Kesko - DIY-shops "K-rauta", Mikhail Burmistrov believes that their company will not sell. "The DIY chain continues to develop. For example, in 2016, K-rauta bought one of the hypermarkets from the Metrika chain. Although the network has been losing money over the past 5 years, it is much less than K-ruoka" ( 492 million rubles in 2015), while the net debt is only 244 million rubles,” the expert says, emphasizing that Kesko does not lose hope to cut losses.
Finnish entry
Kesko holding has been trying to enter the Russian retail food market since 2008. Then the situation was the opposite: Lenta was put up for sale because of shareholder wars, and Kesko claimed to buy it. And she even filed a petition with the Federal Antimonopoly Service for the acquisition of Lenta LLC (submitted subsidiary Kesko Food - Cassa Oy). However, Kesko later informed the antimonopoly service that the company failed to reach an agreement on the acquisition of the network.
In 2012, Kesko independently entered the Russian market with the K-ruoka brand. At the same time, Kesko's main competitor in Finland, the SOK corporation, entered St. Petersburg in 2008 with the Prisma chain, which today has 17 stores: six hyper- and 11 supermarkets.
Now the network has also frozen development plans in Russia. However, according to CEO Jarmo Paavilainen, the company has no plans to leave the St. Petersburg market. "The drop in demand has really affected trade, but we expect a revival next year," - says a top manager.
In 2013, Kesko reported that the holding plans to spend over 100 million euros a year to expand the K-ruoka food hypermarket chains and the K-raut construction hypermarket chains in Russia. Moreover, the main investments and prospects were connected precisely with the product line, and Russia was considered the key region, where retail grew by about 10% per year. In 2015, K-ruoka planned to enter the Moscow region, but did not do so.
“Perhaps, Kesko realized that competition in the hypermarket segment in St. Petersburg is intensifying, and the holding is not ready to make new investments. Kesko entered the market when the euro exchange rate was 40 rubles, and today it is almost 70,” says Nikolai Gabyshev.
Feel comfortable
"The format of hypermarkets does not feel in the best way. The consumer seeks to save, reduce the number of purchases. Therefore, it is formats with a large assortment that are at risk,” said Natalya Kolupaeva, senior analyst at Raiffeisenbank.
Nevertheless, the format of hypermarkets is just the main one for Lenta, and it is increasing the pace of development. "We are progressing on schedule and aim to open 40 new hypermarkets in Russia this year and expect to exceed our ambitious goal of doubling our selling space by December 2016. Today we have a portfolio of projects for 2017, so we have started working over 2018 projects," the retailer said last week. As of September 30, 2016, the total selling space of Lenta in the country amounted to 963.4 thousand m2 (+22.3% compared to 2015).
I'm not sure that Lenta paid 20?% more than other bidders. Adequate shareholders are sitting there and, if they read about it, they should expel the entire management. 1–2?% is fine, but 20?% is too much! The Finns entered the market even when I worked at Pyaterochka in St. Petersburg. To network to go to St. Petersburg and get mass fraction need to invest a lot of money. And their investments should have been greater. K-ruoke had to actively develop the network - to open stores or buy them. But they hesitated. Obviously, this is not the last Finnish retailer to leave the market.
That the K-Rauta chain of DIY stores, owned by the Finnish holding Kesko, is leaving the Russian market. 12 out of 14 stores have been sold to a direct competitor - the Leroy Merlin chain, 2 more will close by mid-summer. A week and a half after the deal was announced, we've rounded up the key facts and statements - and detail how the new owners plan to proceed with the purchase.
Leroy Merlin bought 12 K-Rout stores: 8 in St. Petersburg, 3 in Moscow and 1 in Kaluga. The company did not buy hypermarkets in Tula and Yaroslavl, they will stop working by mid-summer 2018. The cost of the transaction amounted to 12 billion rubles.
Leroy Merlin purchased only K-Rauta buildings- neither the staff, nor the brand, nor the goods were included in the deal. Due to the purchase of hypermarkets, the retailer expanded the area of its stores by 126 thousand square meters. m (including warehouses).
All purchased stores will be closed for reconstruction- for up to 6 months. The exact dates for closing outlets have not yet been announced, but large-scale sales have already started on the network (and even started for goods). All stores will reopen under the Leroy Merlin sign and concept.
The new owner will lay off about 1,800 employees of K-Rauta. New staff - about 1,200 people in St. Petersburg - will be recruited on a general basis. “As soon as the former K-rauta employees finish all their business there and start looking for a new place, we are open to them. On a general basis, they will be able to go through all the stages of interviews in order to become or not to become an employee of Leroy Merlin,” said Alexei Lesnikov, regional director of Leroy Merlin Russia, in an interview with Delovoy Peterburg.
The number of Leroy Merlin stores in St. Petersburg will triple after the purchase of K-Rauta- there will be 12 of them. After the integration of networks, some hypermarkets will be next to each other, however, according to Lesnikov, the company does not see this as a problem. In the near future, Leroy Merlin has no plans to further expand the network in the city.
The company will not “globally change” its approach to suppliers- Lesnikov also stated this. In turn, the general director of Leroy Merlin Vincent Jeanty told reporters that the network now has 44 suppliers in St. Petersburg, almost a third of them coincide with the suppliers of K-Rauta. “Most likely, we will develop cooperation with new suppliers,” Jeanty said.
With the sale of the K-Rauta network, the Finnish concern Kesko completely left Russia. The company began to get rid of Russian assets back in 2016 - then the concern FMCG network "K-Ruoka" (for 11 billion rubles. St. Petersburg "Lenta") and the network of sports stores "Intersport". Kesko has been operating in Russia for 20 years.
In 2016, K-Rauta occupied 1.1% of the building materials market in Russia, the network's revenue for the same year amounted to 13.1 billion rubles. After the closure of the Russian division under the K-Rauta brand, 170 stores continue to operate in Finland, Sweden, Estonia and Latvia.
Leroy Merlin is the largest DIY retailer in Russia. Prior to the purchase of K-Rauta, the company's network consisted of 75 hypermarkets (a market share of over 16%), in 2016 the turnover of the Russian division of the retailer amounted to 186 billion rubles.
Alexey Maksimuk
Subscribe to our Telegram channel to be the first to know the main retail news.
Lenta announces the closing of a deal to acquire Kesko's Russian grocery business, currently operating under the K-Ruoka brand.
Lenta Acquired assets
Kesko's retail business includes 10 hypermarkets and 1 supermarket operating under the K-Ruoka brand in St. Petersburg and the Leningrad region, as well as three land plots in the Leningrad and Moscow regions. Most hypermarkets were opened in 2012-2015, with two stores opened in 2016. The total selling space of the acquired stores is 42.5 thousand square meters. m, of which about 40.2 thousand square meters. m are owned, and 2.3 thousand square meters. m - for rent. The stores fully correspond to Lenta's compact and supercompact hypermarkets, and almost all locations fit seamlessly into the geography of Lenta's stores in St. Petersburg and the Leningrad Region. The high proportion of stores owned is fully in line with Lenta's strategy. Kesko's retail business is owned by six legal entities that were acquired during the transaction.
Lenta CEO Jan Dunning commented:
“We are very pleased that we were able to successfully complete the deal with Kesko to acquire their business in Russia. The deal will significantly strengthen Lenta's position in St. Petersburg, providing additional large residents city access to our stores close to home. The company will become the largest operator of hypermarkets in the city. Stores are located in excellent city locations. The stores will operate under the Lenta brand, with our assortment, logistics and business processes of the company. We expect the store integration process to be broadly completed by the end of the year. With this deal in mind, we expect to open at least 50 hypermarkets by the end of 2016.”
Deal approval and financing
The transaction was approved by the Federal Antimonopoly Service of Russia in November. The transaction is closed, no additional approvals are required. Next, the company will take certain administrative steps, including the registration of assets and leases, the renewal of some licenses, but these actions will be generally certified before the end of this year. The transaction was financed from the company's own funds, as well as through a long-term credit line from a Russian bank at a rate below the current refinancing rate of the Bank of Russia, which will entail a further decrease in the average effective cost of Lenta's debt. JP Morgan and VTB Capital acted as advisors to the deal.
Transaction price
The total transaction price was RUB 11.4 billion, up RUB 0.4 billion due to closing adjustments compared to the previously announced total transaction base of RUB 11.0 billion. The increase is due to the presence on the balance sheet of a larger amount than previously expected Money and their equivalents. Lenta estimates that the value of the acquired real estate and other fixed assets, positive working capital and other non-fixed assets approximately corresponds to the cost paid. The transaction will not result in any change in goodwill on Lenta's balance sheet.
Integration
The integration of Kesko stores into the Lenta chain will begin immediately. Each of the acquired stores will close for approximately a week from December 1 to reopen under the Lenta brand. The stores will operate in the same way as other Lenta stores in St. Petersburg - under the Lenta brand, with the company's assortment, using its logistics, IT infrastructure and business processes. Kesko store staff have already become part of the Lenta team. The company will make every effort to minimize the inconvenience of customers and employees during the integration period. Lenta considers highly qualified employees of Kesko stores to be its great advantage and welcomes them to its staff. Lenta has no plans to cut staff. Kesko's retail business headquarters will be integrated into Lenta's office. Operationally, the integration will be generally completed by the end of 2016.
Deal forecast
Revenue. The effect of the transaction on Lenta's revenue in 2016 will be insignificant (less than 0.2% of 2016 revenue) due to the short period between the closing of the transaction and the end of the year, as well as due to the closure of stores in early December for rebranding and other integration activities. The deal is expected to add 3-4 p.p. to the growth dynamics of the company's revenue in 2017, taking into account the effect of cannibalization. The company expects the acquired stores to reach or exceed Lenta's average sales density by mid-2018.
EBITDA and net income margin. The deal will have a negative impact on EBITDA margin at -0.1 p.p. and net profit at -0.2 p.p. due to one-time integration costs. The effect on EBITDA and net income margins is expected to be insignificant in 2017. The company expects the acquired stores to reach or exceed Lenta's average profitability ratios by 2018.
capital investments. All Kesko stores are newly built to a high standard, so the capital investment for rebranding and adapting to the Lenta format will be negligible. In the near future, Lenta will optimize the operation of the leased and its own DC in St. Petersburg without significant capital investments. In the medium term, additional logistics capacity in St. Petersburg will be required to support further growth in the number of hypermarkets and supermarkets. Today the company is studying possible options solution to this problem. Lenta's updated capital investment forecast for 2016 is RUB 55-60 billion, including the cost of acquiring Kesko stores.
Forecast for the opening of new Lenta stores
New forecast for hypermarket openings. The store acquisitions will increase the previously announced forecast of at least 40 new hypermarket openings in 2016. Lenta now plans to open at least 50 hypermarkets, including Kesko stores. If the number of stores opened in 2016 significantly exceeds this forecast, then the company can optimize the number of projects for 2017 in such a way as to open at least 90 hypermarkets in 2016-2017 in aggregate.
New forecast for the number of supermarket openings. The deal will not affect the forecast for the opening of supermarkets.
The hypermarkets of the Finnish holding Kesko are finally leaving the northern capital. They were swallowed up by the domestic Lenta.
The fact that K-ruoka plans to "pack your bags" has been rumored for a long time, but the deal between the two giants has only now come to its logical conclusion. Company executives bargained for 11 billion rubles in cash for 11 stores, and now Finnish hypermarkets will operate in St. Petersburg and the Leningrad Region until November 30th. However, it should be noted that the sale of the grocery business of K-ruoka to a Russian retailer, to some extent, was reflected directly in the residents of the Northern capital.
In addition to the fact that K-ruok employs about 1,300 people, and no one asked about the preferences of St. Petersburg residents in choosing places to purchase products, the deal has already managed to cause public excitement of a different nature. The most noticeable consequence for the city dwellers of hypermarkets leaving the market was a very generous sale. As the announcements on the official website of the chain and in stores say, from November 23 to November 30, they give away all alcoholic products at half price except for foamy, which is more than relevant for many on the eve of the New Year. The sale is valid in all stores of the Finnish Kesko Group, of which there are 11 in the Northern capital and the region. In fact, this action on the very first day of the event managed to turn into a real apocalypse.
Huge queues were heard from social networks and even conversations on the streets of the Cultural Capital. Claims about the incredible generosity of "K-ruoka" had to be checked personally, for which the correspondent of "Nevsky News" went to the first store that came across.
The first thing that caught my eye was those very huge queues, which are akin only to New Year's Eve, and even then not always. Second distinguishing feature- noticeably modified food basket of an ordinary buyer. Instead of the usual products in carts, they tinkled cheerfully glass bottles, which do not sell from 22:00 to 11:00 and to persons under 18 years of age. Moreover, the amount that Petersburgers are buying up can hardly fit in the head. In some cases the carts were bursting with boxes from various manufacturers. Different because no more than 12 bottles of the same name are released into one hand. At the same time, one should not forget that St. Petersburg, according to recent research by Sober Russia, not only did not fall into the number of the most drinking regions, but, on the contrary, was included in the top 20 sober cities.
Inside the store, it seemed that they were selling the last alcohol on Earth - the shelves were practically empty, and a huge crowd hovered around the lonely bottles on the counters. No offense to the store staff, but the merchandisers are very weak in coping with the influx of St. Petersburg residents greedy for strong drinks. More than clear proof of this fact was the situation that happened right in front of the correspondent: an employee of K-ruoka drove a cart with rum to the empty shelf and began to carefully put the goods on the counter. In fairness, it should be noted that the man worked quickly and accurately, but the buyers acted even more quickly - at the end of the procedure, only a few bottles remained on the shelf from the brought cart. Fortunately, it did not come to battles for the coveted bottle. At least in front of the Nevsky News correspondent.
