Saturday November 3, 2012
Aeon bullish on Carrefour buyout
By LEONG HUNG YEE
DESPITE its relatively pricey acquisition of Carrefour Malaysia's operations, Japanese retailer Aeon Co Ltd appears bullish on its buyout, with the move projected to further strengthen the latter's presence in Asean.
“For Aeon Co, the acquisition of Carrefour Malaysia provides us with the opportunity to expand on our existing roots here in Malaysia and further develop our Asean operations.
“We are trying to expand our business in South-East Asia because there is a growth market,” Aeon's Asean business vice-president and chief executive officer Nagahisa Oyama says.
The group is targeting to open 100 stores in various formats in Malaysia and aims to achieve 300 billion yen in revenue by 2020. It also plans to open stores in markets like Vietnam and Cambodia.
But questions remain on how fast can Aeon Co turn around its newly acquired loss-making Carrefour Malaysia in a relatively high acquisition price and integrate the latter into its business that could eventually benefit Bursa Malaysia-listed Aeon Co (M) Bhd (Aeon Malaysia).
Tokyo-listed Aeon Co paid an enterprise value including equity and debt of 250 million euros (RM990.19mil) for Magnificient Diagraph Sdn Bhd which operates Carrefour stores, a price which analysts opined are relatively expensive, as it values Carrefour three times its book value.
The price was also higher than the earlier expected US$250mil.
Analyst says the almost RM1bil sale tag “seem rather high” for business with relatively low margins.
However, they say the South-East Asian venture is seen particularly attractive as consumer spending accelerates in this region, a huge contrast to developments in the eurozone.
Maybank Investment Bank Research notes that a selling price of some RM900mil would translate into an enterprise value/sales of 0.53 times, versus the 1.19 times at which Carrefour Thailand was sold (but Carrefour Thailand was profitable).
“The price consideration is based on business performance up to date and business forecast. We decided on a figure we could work with,” Nagahisa says.
Carrefour Malaysia currently runs 26 hypermarkets in the country, with annual net revenue of 402 million euros (RM1.7bil) in 2011. However, it is loss making, and its net loss widened to RM81mil in 2011 from RM2.9mil in 2010 due to rising overheads.
Carrefour's existing stores in Malaysia will be rebranded as Aeon BIG while its new corporate name will be Aeon BIG (M) Sdn Bhd.
Aeon Malaysia, on the other hand, has 25 department stores and four supermarkets that generate RM3bil in retail revenue.
The takeover effectively doubles the number of Aeon Co (and subsidiary) stores in Malaysia, giving Aeon a spot as the country's second-largest retail group.
Presently, the country's largest retailer is Giant with over 100 hypermarkets and supermarkets.
“The things we will be doing immediately is to study each store and its performance and we may also, if necessary, pump (money) into them.
“We will craft new business plan for the news stores,” Nagahisa says, adding that Aeon would not rule out closing non-performing Carrefour outlets.
He stresses that the business plan for its new stores will be critical before it makes any decision to relocate or close down any existing Carrefour stores.
Additionally, he says, the stores will be created in different formats to attract different target markets so that they will not cannibalise each other.
Currently, there are about eight Carrefour stores within a two-kilometre radius from Aeon Malaysia stores. The stores in Mid Valley mall are the closest, located almost side by side.
It remains to be seen how things will pan out for the group. Carrefour will undergo a rebranding exercise over the next six months.
However, the value for the exercise or further investments into Carrefour stores was not disclosed.
Nagahisa also points out that Aeon BIG (M) will operate independently from Aeon Malaysia and thus will have no effects on the latter.
However, he says there will be integration in terms on information technology and distribution integrations between the two companies to create synergistic value.
“When you conduct a merger and acquisition, it is not about the current business that one needs to look at but the synergies and potential.
“Tremendous synergies can be gained but our ultimate goal is to be able to provide a better life for Malaysians to help them upgrade their lifestyle,” he adds.
Aeon Co is unperturbed about Carrefour's massive losses and is committed to turn its operations around.
“I believe it can be turned around. Part of the reason for the poor performance was the fact that they did not invest properly.
“We will establish a growth strategy for the next three years and five years and act quickly when required.
“We have full confidence they will become excellent stores,” Nagahisa says confidently.
Analysts concur that Aeon Co will be able to turn around Carrefour, given its profitability in operations.
“We believe they will be able to do it (turning around Carrefour) but we don't know the details of their execution plan.
“Having said that, we believe they will streamline some Aeon Malaysia and Carrefour stores that are located close to each other,” an analyst says.
MIDF Research says Aeon Co may turn around Carrefour's loss-making stores and Aeon Malaysia may eventually benefit from its parent's acquisition.
“Aeon Malaysia's revenue has been on a steady uptrend, growing at a compounded annual growth rate (CAGR) of 9.6% for the 5-year historical period of financial years ended Dec 31, 2007 to 2011.
“The company operates under two segments retailing and property management, which have been historically making profit with a CAGR of 9.2%.
“With their stellar record, we are sanguine that Aeon Malaysia will be able to turn around Carrefour's loss-making Malaysian operations,” MIDF says.
RHB Research says the acquisition will reduce direct competition and there will be significant operational synergies and economies of scale with Aeon's supermarket operations.
Aeon Co is also planning to expand its operations into new emerging markets in Asean such as Vietnam, Cambodia and Indonesia.
Aeon Co has been exploring growth opportunities in new geographic and business areas using its China and Asean headquarters to accelerate an integrated approach to Asian business development.
The company estimates to post 15 billion to 17 billion yen in operating profit for its Asean market this year.
Affin Investment Bank sees three positive implications from Aeon Japan's acquisition of Carrefour Malaysia's operations.
First, it says, the massive investment reflects management's confidence in the growth potential of the consumption and retail sector in Malaysia a space in which Aeon Malaysia operates.
It adds that this will provide good operating synergies since Aeon Malaysia is a department store targeting middle-income group while Carrefour, which is a hypermarket operator, caters to low-to-middle-income consumers.
“Third, Aeon Japan's regional ambitions may open up new growth opportunities for Aeon Malaysia,” Affin says.