Magnit - Acquiring Dixy's Retail Operations

Magnit has reached an agreement to acquire the Dixy retail chain (2,651 stores) for R92.4 bln. The deal will provide a critical scale in Moscow and St Petersburg that would have been difficult to achieve organically. We calculate the immediate value accretion from the deal at R19 bln, whereas the longer-term effect will depend on execution and Magnit's ability to build a successful offering in Moscow. We do not yet incorporate the acquisition into our model, as we await completion of the deal and more details on Dixy's operations. > Dixy Holding currently operates 2,612 Dixy convenience stores, which in 2020 generated R281.4 bln in revenues. It also operates 39 superstores under the Megamart brand, which generated R17.4 bln in 2020. The majority of the stores are located in Moscow Region, while there is also a sizable presence in St Petersburg. As part of the transaction, Magnit will also acquire five distribution centers with a total floor space of 189k m2, located in Moscow and St Petersburg and Chelyabinsk Region.> As of its most recent reporting (for 1H19), Dixy was a low-margin business, with an EBITDA margin of 4.4%. However, we believe this can easily be lifted to 6.0% following the integration. We assume 5% revenue growth in 2021 and calculate 2021 implied EBITDA at R18.9 bln.> Magnit's GDRs are now trading at 5.9 times 2021 EBITDA, meaning Dixy should be valued at R111.5 bln once it is integrated. This corresponds to R19 bln in value from the deal, or 4.0% of Magnit's current market cap of R525 bln.> We like the timing of the deal, as we have been expecting Magnit to turn out sustainable gains in customers and improved business efficiency. That said, the company has not yet built a successful CVP in Moscow. We calculate its sales density in Moscow at R330k per m2 per year, while for Dixy it was R361k m2 in 2020. So we assume margin gains but not revenue gains following integration. Magnit will retain the Dixy brand and the brand of its legal entities.> We assume Magnit's net debt (IAS 17) at R154.4 bln as of end-2021. The deal would lift that to R246.8 bln and put the net debt/EBITDA ratio at 1.8. The transaction is expected to be financed using Magnit's existing cash and available undrawn loan facilities. The company says that the deal should not limit its ability to distribute dividends.> On our numbers, the pro forma revenues of the merged business would approach R2.0 trln in 2021E, which would still be behind the R2.2 bln of X5 Retail Group (Magnit/Dixy is trailing X5 on revenues by a year).> The Dixy acquisition should allow Magnit to avoid margin pressure in Moscow, given that organic expansion of a similar scale would require massive price investments.> We do not yet incorporate the acquisition in our model, as we wait for the deal to be completed and more details about the acquired business to emerge> As of end-1Q21, Magnit operated 1,332 convenience stores in Moscow (the deal would double them to 2,661). According to our Ivanov Survey, Magnit and Dixy were visited by 30% of respondents (versus 60% for Pyaterochka). Accounting for the overlap between the two chains, the customer base of the merged company should be about 52% of the Moscow population, we estimate.