Page 29 - bne_Magazine_April_2018

bne April 2018 Cover story I 29
Giga-merger
Russia remains a volatile place to run a company and after the 2008 crisis struck, the economy took a huge hit as the virtuous circle stopped turning. Things then got worse for retailers as
Said Gutseriev
Member of the Board of Directors of PJSC SAFMAR
“We were thinking about where we needed to go next and we decided that with the advent of the internet
and e-commerce, retail offered the most attractive investments”
economic growth sank to zero in 2013 despite oil prices remaining over $100 per barrel as the petro-driven growth model was exhausted and Russia ran up against its structural limitations. Incomes began to fall and real dispos- able incomes have been negative for almost three years now.
However, as the market leader M.Video was insulated from the worst of the slow- down. “When the market starts to slow then the weak companies start to disap- pear. We had the leading model and lots of online projects were folding so we didn't feel the slowdown that much. Our market share was growing dramatically and we were still profitable,” says Tynkovan.
The same story has repeated itself in many sectors connected to the consumer, which have seen a rapid consolidation as the leading companies increased their market share and maintained sales volumes, even if margins have been squeezed.
Now the game is going to change again with the merger, as the combined com- pany Eldorado will be unassailably large.
As M.Video is already a publicly traded company the combined entity will remain listed.
Safmar has bought out Tynkovan’s 57.7% stake in M.Video with the remaining 42.3% as a traded free float. Importantly Safmar also made a voluntary buy out offer to the minority investors at the same prices as for the main shareholders, as part of the deal, which is not always the case. When state-owned banking giant VTB recently bought out the owner of Russian regional supermarket chain Magnit, minority investors were outraged when VTB deliberately limited the stake purchase to 29%, despite the fact that owner Sergei Galitsky owned 32%, to avoid having to make a mandatory offer to minority shareholders. Leading fund Prosperity Capital Management called the deal a “spit in the face for all inves- tors.” A quarter of M.Video’s minorities took up the buy out offer.
The synergies of the M.Video-Eldorado deal are obvious, with stock control being the most important. Getting stock management right is a key element in retail as if you have too much stock you loose money and if you have too little then you lose revenues, says Tynkovan. Having a single distribution platform is also a cost cutter as one logistics system can serve both brands. Safmar’s position as a major player in the warehousing business can only add to the improved profitability mix.
“They are similar businesses and they have always competed as they have the same number of stores and a similar brand,” says Gutseriev. “The idea is to put the two brands onto the same model – the M.Video model – and centralise the stock and management functions into one entity.”
Following the expected deal, Tynkovan says he will concentrate on cementing the lead of the combined entity on the Russian market and ensure a smooth merger, but longer term both men
say they have ambitions to expand internationally.
“We are strategic investors and not financial investors,” says Gutseriev. “We have some final discussions about the deal. We will go through all corporate procedures and submit the terms of
the transaction for a vote at the EGM, so all the shareholders will have a say. For sure, M.Video is doing the Eldorado deal at absolutely market conditions, and in adherence to best corporate practices. We are in this retail business for the long-term and that means best practices as that is the best way to run
a business.”
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