Brazilian retail: whose Waterloo?

The battle of Brazilian retail escalated on Monday with an exchange of press releases between Carrefour and Casino, the French arch-rivals slugging it out over Grupo Pão de Açúcar, the Brazilian supermarket chain.

As the struggle progresses, Casino is claiming the high ground. Carrefour and GPA are lawbreakers, its says, and it will defend its rights to the end. But the proposed deal, so far portrayed as an affront to Casino’s (CO:PAR) interests, could yet work in its favour. As Napoleon (pictured) might have said, it ain’t over till it’s over.

Carrefour said on Monday morning its board had approved the proposal it received from Gama, a Brazilian special purpose enterprise, to join its Brazilian assets with those of GPA (aka CBD, or Companhia Brasileira de Distribuição, GPA’s holding company).

Casino responded that Carrefour’s board “may be held liable” for approving “a hostile transaction arising out of illegal negotiations”. The deal cannot go ahead, it reiterated, without Casino’s approval – something it is in no mind to give. (Casino shares control of GPA with Abilio Diniz, GPA’s founder, and is due to gain full control next year.)

While the proposal has ostensibly come from Gama, there is little doubt that Diniz is the mastermind behind it. And Diniz, of course, is fully aware the deal will go nowhere unless Casino can be persuaded to sign on the line.

Why would it? Carrefour (CA:PAR) says the deal would produce annual synergies worth about €700m. Taxed and capitalised, that’s worth about €5bn. Add a fat premium, and Casino could walk away with, say, €8bn.

Why would it walk? Some analysts say if it rejected the deal it would find itself in a much more difficult environment in Brazil than it expected: with a hostile co-shareholder (Diniz) and the possibility of a second-choice tie-up between the Brazilian operations of Carrefour and Wal-Mart, creating a competitor bigger than GPA itself.

As Lex points out, brawling in Brazil can be a costly business. And as Christopher Hogbin, retail analysts at Bernstein Research, told beyondbrics: “Casino’s best outcome may be to get paid a lot to walk away.”

There are other good reasons to cash out. Nearly 50m Brazilians have entered the ranks of the middle class during the past decade as earnings and disposable incomes have soared. Brazil will go on being an important growth market – especially for foreign retailers, like Casino and Carrefour, whose home markets are stagnant. But the low-hanging fruit have been plucked.

Casino may decide it now has the chance to cash out at a huge margin from a market that has already delivered much of its potential. It could then concentrate on its other, highly promising, Latin American operations in Colombia, Argentina and Uruguay and leave Carrefour – reeling from a massive pay-out – to squeeze more value out of Brazil.