Mexico’s Biggest Luxury Chain Wins Over Investors With M&A Burst

(Bloomberg) -- Mexico’s biggest department-store operator became a dealmaker to jump start growth. Its second major purchase this summer is winning over investors who were startled by the first one.

El Puerto de Liverpool SAB posted the second-biggest returns among major Mexico companies since agreeing Aug. 10 to buy the Suburbia clothing chain from Wal-Mart Stores Inc. in a deal valued at $1 billion. The shares have more than recovered from a dive after the almost 170-year-old company run by the David, Michel and Guichard families agreed in July to acquire a minority stake in Chile’s Ripley Corp SA for at least $300 million.

The sudden burst of deal-making showcases a shift for Liverpool, which is turning to acquisitions after years of patiently expanding its luxury department-store chain. The two agreements are the company’s biggest since increasing its stake in the Regal Forest retailer in 2010. The shopping spree marks two other milestones as well. Suburbia will enable Liverpool to tap a broader domestic market of less-wealthy consumers, while Ripley marks the retailer’s first big foray abroad.

“There’s clear upside in both deals -- Suburbia is a much more direct and strategic feat,” said Carlos Hermosillo, an analyst at Actinver. The Chile acquisition “is a gradual entrance to the South American market. It’ll allow Liverpool to expand outside of Mexico, where there isn’t much room to grow anymore.”

Liverpool’s investor relations manager, Jose Antonio Diego, declined to comment further on the deals.

Roller-Coaster Stock

The announcements sent Liverpool’s shares on a topsy-turvy ride. The Chile deal disappointed investors who saw it as too expensive and who wanted a domestic expansion plan, prompting the biggest stock drop in almost two months. The Suburbia purchase was better received, leading shares to reverse losses and surge the next trading day.

Liverpool has advanced 6.5 percent since the Suburbia announcement, six times the increase of Mexico’s benchmark stock index. Shares closed Monday at 201.97 pesos, boosting the market value of the Mexico City-based retailer to about 270 billion pesos ($14.8 billion).

The Suburbia acquisition shows “great potential” compared to Liverpool’s prior plan to grow organically through the company’s Fabricas de Francia stores in Mexico, said Barclays Plc analyst Benjamin Theurer in a phone interview.

Liverpool sells a wide range of products from gourmet chocolates to leather couches and home appliances and caters to Mexico’s upper-middle class. Suburbia focuses on clothing for a lower income bracket, where a pair of jeans can cost as little as 258 pesos, or about $14.

‘Strategic Buy’

“This purchase will give them immediate access to 119 stores at a national level, that’s tremendous,” Theurer said. “It’s a strategic buy to get into a segment where Liverpool isn’t present and was hoping to be in six to 10 years’ time.”

Liverpool’s sales will increase by about 15 percent once Suburbia is integrated, Theurer estimates. Actinver’s Hermosillo said he’d consider raising his target price by 8 percent to 10 percent from the current 225 pesos.

Both purchases will be financed with a mix of cash and debt issuance, Liverpool has said. The company’s net debt may rise to 2.2 times earnings before interest, taxes, depreciation and amortization from 0.6 times, Theurer said. That level would still be manageable, he said.

Mixed Reactions

The negative reaction by investors to the Ripley stake purchase was due to the price tag and the fact that it’s a gradual transaction, Hermosillo said. The company agreed to buy at least 25.5 percent and as much as 100 percent over the next five years at a 25 percent premium over the last closing price the day the deal was announced.

The agreement values the Chilean company at about $1.2 billion. Depending on whether Liverpool’s stake ends up on the lower or higher range of the spectrum, the price tag could be anywhere from $300 million to the full price.

“It’s a heavy investment and Liverpool isn’t even going to have full control initially,” Hermosillo said. “Adapting to the controlling family’s strategy will be challenging but they’ll expand their geographic footprint in an important way.”

Branches of the family that controls Ripley have disagreed on the price Liverpool is offering, according to local reports. That may mean one side will have to cede more of its stake than originally planned to compensate for the other, Vector Casa de Bolsa analyst Hector Maya said in a phone interview.

Hermosillo doesn’t expect another acquisition soon, as Liverpool has enough on its plate for the moment. “I’d be surprised if they announce anything else,” he said.

To contact the reporter on this story: Andrea Navarro in Mexico City at anavarro30@bloomberg.net. To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Bruce Rule