Proceeds from the sale of 25% of Continente's owner to CVC will be used for new investments. "We will be very rigorous in identifying opportunities and we are in no hurry," says Sonae's CFO.
It wasn’t at the IPO in 2018, due to conditions in the stock market, it was now. On the first day of August, Sonae announced the agreement to sell 24.99% of Sonae MC to CVC Capital Partners for €528 million, plus a deferred contingent payment of up to €63 million, in a deal that had been in the pipeline for the past two months. But why now and for what purpose? And what does the European private equity giant get in return?
“Through the entry of a strategic investor such as CVC, we have achieved many of the objectives we had when we explored the IPO but with more attractive conditions for Sonae, namely a substantially higher valuation and the possibility to count on a reference shareholder that will contribute with its know-how and experience to the success of the company,” underlines João Dolores, Sonae’s CFO, in response to ECO.
Sonae SGPS advanced on October 4 2018 with an IPO of up to 25% of the capital, which valued the company between 1.4 and €1.6 billion, but abandoned the operation on the 11th in the face of strong turbulence in the markets. The month would end as the worst for the S&P500 index since September 2011. The CVC deal values retail in a range between 2.1 and 2.36 billion. Even so, João Dolores does not rule out selling new portions of the capital on the stock exchange: “The possibility of Sonae MC’s IPO may be explored in the future.”
The timing and valuation were praised by analysts. Both JB Capital Markets and CaixaBank BPI pointed out that the transaction values Sonae MC above the value that was attributed by them. “It crystallises part of the value of Sonae’s core unit with an attractive valuation,” stresses Sonae’s CFO, adding that “the timing could not be better” given covid-19’s positive impact on food consumption and outperformance of peers. The retailer achieved first-quarter revenue growth of 5.4% and EBITDA growth of 7.3% year-on-year.
What motivated the deal?
The financial director of Sonae SGPS points out that the “operation improves the financial position of the group”, i.e. it allows to shrink the debt, which at the end of June was 1.5 billion. But this will not be the main reason, nor the ultimate destination of the money. The sale “allows us to look at new investment opportunities with more ambition and confidence,” he explains.
Nowadays, having $528 million sitting around makes little or no sense. But João Dolores does not open up about Sonae’s plans: “It is too early to say exactly where we will invest in the future. What we can assure you is that we will be, as always, very rigorous and disciplined in identifying and analysing opportunities and that we are in no hurry. Sonae will do everything to remain true to its successful track record of creating value for its shareholders and other stakeholders.”
Sonae held a conference call with analysts on Monday to give some explanations about the deal. Financial analyst António Seladas, from AS Independent Research, sent a note to clients, where he gives an account of what was said and points out that the company has stated that it has no plans to use the proceeds for extra dividends or share purchase programmes.
The reinforcement in Nos, where Sonae SGPS has, directly and indirectly, about 33% of the share capital, is a scenario admitted by António Seladas. It should be noted that the largest share (52.15%) is held jointly with Isabel dos Santos, whose shares have been seized. The shares dispersed on the market (free-float) are equivalent to around 40%. However, in the conference call, the CFO stated that the company is “satisfied” with its current holdings in Sonae Sierra and Nos.
Attractive dividend for CVC
For CVC, the investment allows it to gain exposure to a retailer that generates high cash flows and pays this year 140 million in dividends related to the 2020 results, which, taking into account the valuation implicit in the Sonae deal, is equivalent to a return of 6.6%.
In the conference call, João Dolores referred that there is a dividend policy defined for Sonae MC, but without disclosing which one. “We cannot comment on the terms of the agreement made between the parties, which, understandably, is confidential. What we can say is that CVC will have the usual rights of a minority shareholder with a stake of this magnitude,” he replies to ECO.
The CFO guarantees, however, that the remuneration to shareholders will not create obstacles to the investment plans of the owner of the Continente chain. “Regarding dividends, we do not expect this transaction to represent any constraint or limitation to Sonae MC’s financial flexibility.”
Just as CVC expects to value its stake, João Dolores also believes ” the significant experience that the new partner has in international retail markets and the disciplined way in which it envisions long-term value creation can translate into new ideas that can be explored by Sonae MC, contributing to the company’s success in the future. The company’s strategy will not change, but the way it is executed can greatly benefit from the challenge and contributions of our new partner.
To analysts, the CFO admitted the possibility that CVC will divest through an IPO, but believes that Sonae has found a long-term partner for retail. The transaction is expected to be completed in August, at which point the private equity firm will be represented on Sonae MC’s board of directors.