Magnit, Russia’s third-largest food retailer, said it aims to list on the London Stock Exchange to finance more hypermarkets and discount stores. Magnit, which is already listed in Russia, could raise about $552 mln, based on its current share price. It plans to offer 11.3 mln shares in the form of global depositary receipts (GDRs).
The company raised $368 mln in a domestic initial public offering in 2006, selling 19 percent of its shares at $27 each.
Magnit, which opened its first hypermarket store last October, had a 1.9 percent share of the fragmented Russian food retail market in 2007. The food sector grew 32 percent last year to $191 mln, or $1,330 per capita, and UBS analysts expect it to grow 21 percent a year on average in the next three years.
The top 10 players control only 12 percent of the market and the entry of global giants such as Wal-mart Stores Inc and Carrefour is likely to spur consolidation, analysts say.
Magnit’s bigger domestic rival X5 Retail Group, which manages the Pyaterochka and Perekrestok grocery chains, for example, has acquired Kama Retail to gain control over 29 stores.
Shares of Magnit have surged 80 percent since the IPO to trade at 29 times 2008 earnings — in line with X5 Retail despite a lower EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 4 percent, versus X5 Retail’s 6.3 percent in 2007.
Magnit operates five hypermarkets, with an average size of 4,000 square meters, and plans to open five to 30 hypermarkets and 300 discount stores this year.
Goldman Sachs, upgraded Magnit to “Neutral” from “Sell”, with a 12-month target price of $50.00, but said there were high risks with its plans to open more hypermarkets. These included its lack of expertise in this area, the huge investment required and the time it would take to roll out new stores.
Hypermarkets are likely to have higher margins because of higher portion of non-food sales, as well as cost savings derived from larger purchasing scale and lower rental costs.
But with an average launch cost per hypermarket at $18 mln and 18 months to launch a store, analysts expect Magnit’s capital expenditure to hit $700 mln in 2008 and $600 mln in 2009.
Goldman analysts expect the retail chain’s revenue to grow 44 percent to 5.3 bln and net earnings by 23 percent to $120 mln by end of this year, with a net margin of 2.3 percent.
Magnit was founded in 1994 in Krasnodar as a wholesale distributor of perfumery, cosmetics and household chemical goods and moved into the grocery retail market in 1997.
Its London listing is being arranged by Deutsche Bank and Morgan Stanley.
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