Russian Retail - M&A the New Growth Driver for the Biggest Players

Accelerated M&A activity in the food retail sector reduces the risks of increased price competition, as modern space growth remains at 2.5-2.8% per year versus industry revenue growth of 8-9%. Recent acquisition multiples are well below the levels seen in 2010, so ROIs comparable to organic growth can be achieved with smooth integration. We are positive on Magnit but cautious on Lenta.> Market consolidation accelerated last year, with the share of the top five rising 3 pp to 32%, above the average increase of 1.4 pp per year over 2016-19. Last year's uptick was driven by Covid-related changes in shopping patterns, which drew more customers to large chains. > The share of the top five remains well below levels in some European countries (57-61%), but we think the 47% level in the US is a better benchmark for Russia, so we assume a 45% longer-term figure for the country to account for its larger territory and ongoing online boom. > M&A has provided an additional boost this year, with three deals already announced to acquire companies (Dixy, Billa and Semya) with combined revenues of R348 bln (2% of the market). Considering Magnit's and Lenta's ambitious plans, we expect such deals to continue happening.> We welcome M&A, as it could help modern space growth in the industry stay at just 2.5-2.8% per year while revenue growth continues to run at 8-9%. In this case, there should be no additional price competition, in contrast to what we would see alongside organic space growth.> The impact on companies will depend on the deal price tags and how smoothly integration proceeds. However, we point out the strikingly lower deal multiples relative to the last wave of M&A in 2010 (an average EV/S of 0.3 now versus 0.8 a decade ago). > On these terms, the deals can generate an ROI of more than 15%, versus the 17% of organic expansion. We are positive on Magnit: assuming no deal-related ROI distortion, its multiples should at least stay at the current levels, while the EBITDA and revenue contribution from the acquisitions should boost its overall valuation.> We are less upbeat on Lenta, which does not have an integration track record. Its deal could prove ROI-dilutive and keep the company from unlocking its FCF potential. This year, M&A is set to account for two thirds of the space Lenta adds, and this could remain the case going forward given the company's ambitions to double revenues by 2025.