Exclusive - Germany's Metro considers listing minority stake in Russian unit

Megan Davies, Olga Popova and Matthias Inverardi
November 19, 2013
The checkout area of one of the top three cash and carry markets of Metro AG is seen in Sankt Augustin
The checkout area of one of the top three cash and carry markets of Metro AG is seen in Sankt Augustin near Bonn March 18, 2013. REUTERS/Wolfgang Rattay

By Megan Davies, Olga Popova and Matthias Inverardi

MOSCOW/DUESSELDORF (Reuters) - Europe's fourth-biggest retailer Metro AG is considering a stock market listing of a minority stake in its Russian unit to help fund its expansion, the company said on Tuesday, confirming an earlier Reuters story.

Metro, which has been restructuring its portfolio to cut debt and focus on core businesses, said it wanted to maintain long-term control, a spokesman said in a written statement, stressing no formal decisions had been made on the issue.

"Metro Cash & Carry Russia is one of the most remarkable success stories in the history of the group," he said. "We are currently reviewing additional funding source options for a step-up in expansion."

Market and banking sources said a stock offering for the Russian unit, which runs 70 big-box Cash & Carry outlets, could be worth more than $1 billion (620 million pounds).

A flotation, likely run by Sberbank and Goldman Sachs , could be in London, two sources said, but is unlikely to happen this year. The IPO would not involve Metro's Media Markt consumer electronics chain, the sources said.

Metro's shares, which have risen strongly since July on turnaround hopes, jumped 8 percent on the news.

"It's a bit of a jewel in the crown," said Wood & Co analyst Patrick Shields. "But of course the Russian IPO market is hot ... and Metro has often been proposed as a value-release breakup story."

One source said Metro was taking the step to boost growth as the Cash & Carry business - one of the dominant players in Russia and one of Metro's most profitable businesses - is lagging the momentum of the rest of the market.

"A high-quality Russian consumer growth story could easily attract a high multiple," Citi analysts Alastair Johnston and Pradeep Pratti wrote in reaction to the Reuters story, adding a valuation in excess of 10 times operating earnings would be justified.


Metro, which runs cash and carries, supermarkets, department stores and Europe's biggest consumer electronics chain, is rationalising its units after a surprise dividend cut and profit warning earlier this year, helping it cut net debt by 1.9 billion euros to 6.3 billion in the first half.

VTB Capital's Maria Kolbina said investors would look at Poland's Eurocash , Turkey's Bizim and Russia's O'Key as valuation benchmarks. They trade at 18.9, 19 and 17.4 times P/E (price to earnings) respectively for 2014, according to VTB Capital. Metro group currently trades at 15.9.

"Russia is the fastest growing food retail market in Eastern Europe and one of the fastest growing and most fragmented in the entire emerging markets universe," she said.

Metro has more than 700 cash and carries in 29 countries and the business accounts for almost half of group sales. It entered Russia in 2001, with the country becoming its most profitable unit with an underling operating margin of 11 percent, Morgan Stanley analysts estimate.

Russia is Metro's third biggest market for its cash and carry business, behind Germany and France, with sales of 4.1 billion euros in 2012.

Chief Executive Olaf Koch has reported progress in turning round a group hit hard by a downturn among independent retail and hospitality industries, with the cash and carry business reporting quarterly sales growth in Europe.

Metro has long stated its wish to sell off its Kaufhof department stores and Real hypermarkets divisions to focus on its cash and carry and consumer electronics stores, which it feels have better expansion prospects.

A year ago, Metro sold its Real hypermarkets in eastern Europe to France's Auchan in a 1.1 billion euro deal

Russia's $2 trillion economy is struggling with weakening growth as weak investment, a shrinking workforce and ageing Soviet-era capital stock all act as a drag, although consumer spending is still buoyant.

Metro is Russia's fourth biggest retailer behind X5 , Magnit and French chain Auchan. Its local rivals include Lenta, which is controlled by state bank VTB and private equity fund TPG , and is also planning to float on the stock market.

The banks for the Lenta float, expected early next year, are JPMorgan , Credit Suisse , UBS , Deutsche Bank and VTB, sources said.

Sources said the choice of Sberbank and Goldman was partly because those banks did not conflict with the banks selected for Lenta's IPO.

(This story was refiled to add surname of analyst in paragraph 11)

(Additional reporting by Maria Kiselyova and Arno Schuetze; writing by Douglas Busvine and Emma Thomasson; editing by David Evans)