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Hedge Funds Score Big in Brazil Bet Abandoned by French Grocer

Hedge Funds Score Big in Brazil Bet Abandoned by French Grocer

(Bloomberg) -- French grocer Casino Guichard-Perrachon SA spent the past decade trying to find success with its wager on Brazil electronics retailer Via Varejo SA. Now that it’s finally given up, investors who stepped in to pick up the pieces are raking in a big payoff.

Shares of the retailer have surged 40% since June 14, when a group of hedge funds partnered with retail mogul Michael Klein to buy at auction the 36% stake owned by Casino’s Brazilian subsidiary, Cia Brasileira de Distribuicao, known as GPA. It’s the best-performing Brazilian stock for the period, as markets cheered new management put in place after the ownership change.

Hedge Funds Score Big in Brazil Bet Abandoned by French Grocer

“At the time of the auction, you had a cheap stock, a high-revenue company and a chance for a turnaround,” said William Leite, head of the equities desk at Garde Asset Management, which took a stake in Via Varejo at the auction. “It looked like a very good opportunity.”

Spearheading the changes at Via Varejo is the Klein family, which has a long history with the firm. In the 1950s, Polish immigrant Samuel Klein founded the retail chain Casas Bahia, which was absorbed by Via Varejo in 2009. A series of clashes between Casino and the Kleins ensued. But with the French grocer out, the Klein clan became Via Varejo’s biggest shareholder. It named Michael Klein, Samuel’s son, as the company’s chairman, and Roberto Fulcherberguer the new chief executive officer.

Under the new management, the firm has poached executives from rivals, including a new marketing director from Magazine Luiza SA, Ilca Sierra, and a chief digital officer from MercadoLibre Inc., Helisson Lemos.

“The new names and the firm’s new strategy are drawing investors’ attention,” said Andre Lion, a partner and portfolio manager at Ibiuna Investimentos Ltda., which also acquired Via Varejo shares at the auction. “The expectation of operational improvement is behind our investment thesis.”

That’s far from a sure thing. Via Varejo posted a net loss of 49 million reais ($13 million) in the first quarter after a loss of 267 million reais for 2018. And while last year’s net revenue of 26.9 billion reais far surpassed rival retailer Magazine Luiza’s 15.6 billion reais, its market value is less than a quarter as large.

Hedge Funds Score Big in Brazil Bet Abandoned by French Grocer

“We brought together the best team in Brazil’s retail sector,” CEO Fulcherberguer said in an emailed statement. “With this team, we’ll turn around the firm’s operations and increase Via Varejo’s leadership in the sector.”

Via Varejo has been under fire from analysts as it lost ground to competitors on e-commerce while Brazil’s worst recession on record roiled profits. A spokesman for Casino declined to comment.

It’s still unclear how the new management will handle technology investments, marketing and in-store refurbishments, Banco Bradesco BBI SA analysts led by Richard Cathcart wrote in a report earlier this month.

Even the hedge fund managers willing to back Klein’s turnaround plans are bracing for a long road ahead, despite the recent payoff.

“Those things take a lot of time,” Joao Braga, the co-head of equities at XP Asset Management, said on his Twitter account on July 3. “Nobody should be in a turnaround case to gain short-term money.”

Braga, whose XP Long Biased FIC FI Multimercado fund has topped 99% of its peers over the past three years, also bought shares in GPA’s auction.

“The easy money to be made in Via Varejo is gone,” Garde’s Leite said. “From now on, management will need to deliver the turnaround for the stock to keep climbing. And we believe they will.”

--With assistance from Fabiola Moura and Albertina Torsoli.

To contact the reporters on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net;Felipe Marques in Sao Paulo at fmarques10@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Steve Dickson, Daniel Taub

©2019 Bloomberg L.P.