China’s Retail Grocers Consolidate Further; Wumart to Buy Stores and Equity Stake From Local Competitor CP Lotus for $372m

October 16, 2013 Leave a comment

China’s Retail Grocers Consolidate Further

Wumart to Buy Stores and Equity Stake From Local Competitor

LAURIE BURKITT in Beijing and CYNTHIA KOONS in Hong Kong

Updated Oct. 15, 2013 12:06 p.m. ET

Chinese supermarket chain Wumart Stores Inc. will acquire stores and an equity stake from a local rival for about US$372 million in cash and stock, in the latest move to consolidate China’s fragmented retail grocery market. Wumart said Tuesday that it struck a deal to buy the majority of C.P. Lotus Corp.’s retail outlets in China for 2.34 billion Hong Kong dollars (US$301.8 million). The acquisition will add 36 stores to Hong Kong-listed Wumart’s 145 markets and 396 minimarkets across China, according to a statement from the company. Wumart will take control of C.P. Lotus stores in the cities of Beijing and Shanghai and provinces other than the southern regions of Guangdong and Hunan, the statement said.Wumart also will buy a roughly 10% stake in C.P. Lotus for HK$547.9 million, while C.P. Lotus is acquiring a nearly 14% stake in Wumart for HK$2.89 billion, the statement said. The two companies will become one another’s second-largest shareholders. J.P. MorganJPM -0.76% Chase & Co. was Wumart’s financial adviser.

Meanwhile, private-equity firm Ascendent Capital is buying 16 million shares, or 1.09%, of Wumart for HK$232 million. A representative of the firm will join Wumart’s board of directors.

C.P. Lotus, which is controlled by Thai billionaire Dhanin Chearavanont, currently has 57 outlets in China. They include hypermarkets, or large stores that sell household goods and clothing in addition to food, and supermarkets.

Increased competition amid a vast, fragmented market of grocery stores and hypermarkets is sparking consolidation in the world’s second-largest economy. Wal-Mart Stores Inc., WMT -0.42% which operates nearly 400 stores in China, said in an interview last week that it is considering acquisitions in the country to strengthen its position in regions where it doesn’t already operate.

China Resources Enterprise Ltd., which runs more than 4,100 retail outlets across China, recently added 131 stores to its network by forming a joint venture with U.K. retailer Tesco TSCO.LN +0.82% PLC.

Industry watchers say that grocery retailers in China are on the hunt to increase their size and that bigger competitors in the sector are poised to win as the country’s market consolidates.

“We believe the hypermarket space will see rapid consolidation and that the big will get bigger,” said Vineet Sharma, head of consumer research at Barclays.

The statement said the acquisition will provide Wumart with an immediate entry into crucial geographic regions, such as eastern China.

Acquisitions of minority stakes by each company will further collaboration, the statement said. It added that C.P. Lotus’s new stake in Wumart will give it the ability to participate in Wumart’s operations and guide the acquired stores. C.P. Lotus will continue to run its own stores in China’s Guangdong and Hunan provinces.

In the fragmented sector, Wumart has a 1.8% share of hypermarket sales in China and a 0.3% share of supermarket sales, according to market-research firm Euromonitor International. Top hypermarket Sun Art Retail Group Ltd. 6808.HK +0.86% holds a 13.6% share and leading supermarket China Resources holds a 2% share, according to Euromonitor.

C.P. Lotus posted a loss of 392 million yuan last year, compared with a profit of 23.8 million yuan in 2011. Wumart’s net income totaled 602 million yuan in 2012, up 2.7% from a year earlier.

Sales across China’s hypermarkets rose 13% to 574 billion yuan ($94 billion) in 2012, according to Euromonitor. Supermarket sales rose 10% to 1.77 trillion yuan last year

Filed under Macro Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment