- Magnit (MGNT RX / MGNT LI: O/W, TP RUB6,670 / $19) announced an agreement to acquire Dixy for RUB92.4bn
- Deal rational: quick gateway to expand into lucrative regions and reduce gap vs X5
- At this stage Magnit reiterated its 2021 guidance published in February as well as 2021-25 longer-term targets.
Magnit (MGNT RX / MGNT LI: O/W, TP RUB6,670 / $19) announced an agreement to acquire Dixy for RUB92.4bn, expecting the deal to close in August-September of this year. Magnit appears to be utilising its balance sheet capacity to boost business volumes in lucrative regions, while reducing the gap to X5 and in general reducing competition on the market. That, in turn, is likely to create synergies in terms of purchasing conditions, potentially supporting profitability. Considering that and the announced valuation level, we believe the transaction is value accretive for Magnit. While the leverage should inevitably increase in the near-term, that is likely to stay at a comfortable level for the management and is unlikely to curb Magnit’s dividend story.
Transaction details. Magnit agreed to acquire DIXY Holding Ltd, managing 2,612 Dixy convenience stores and 39 Megamart superstores, for RUB92.4bn enterprise value (incl. debt). The transaction is expected to be financed using Magnit’s existing cash and available undrawn loan facilities. The deal is subject to FAS approval, as well as meeting other conditions agreed by the parties and is expected to be closed by 31 August (the date may be prolonged to 30 September).
Dixy business overview. Most of the Dixy convenience stores are located in Moscow / Moscow region (1,329 outlets) and St. Petersburg / Leningrad region (458 outlets). Most of the superstores operate in the Sverdlovsk region and four stores are located in the Tyumen region. The total selling space of Dixy Group chain amounts to 854k sqm, of which 778k sqm are in the convenience format and 76k sqm in the superstore format. As part of the deal, Magnit would also acquire 5 distribution centers with the total space of 189k sqm located in Moscow, St. Petersburg and the Chelyabinsk region. Dixy generated RUB298.8bn revenue in 2020, implying ~RUB350k annual revenue per sqm, we estimate, compared to Magnit’s RUB205k in 2020. The latest Dixy’s IFRS report for 1H19 reveals 4.4% EBITDA margin (under IAS 17).
Deal rational: quick gateway to expand into lucrative regions and reduce gap vs X5. The transaction would add 11% to Magnit’s total selling space and 19% to revenue (based on 2020 data). As a result of the transaction, Magnit would expand its presence in Moscow (incl. region) from 8% currently to 12.6% of the store base and in St. Petersburg (incl. region) from 4.3% currently to 5.7% of its total store base, we estimate. Magnit set to reduce its revenue gap vs X5 from 21% to 6%, on our estimates, based on 2020 numbers. That is likely to create synergies in terms of purchasing conditions, supporting margins. In the meantime, it is important to note that Magnit in fact replaces Dixy in regions of presence, creating no new selling space and in fact reducing competition on the market. The intention to keep the Dixy brand in place might be reasonable, considering the brand strength in its regions of presence (especially Moscow). However, the integration of loyalty programs, as well as forecasting and planning tools might be challenging, at least at initial stage of the joint business development.
Value accretive deal. The indicated deal price of RUB92.4bn suggests c.0.3x EV/Sales and 7.0x-6.2x-5.2x EV/EBITDA valuation (Alfa-Bank estimate based on RUB298.8bn 2020 revenue and EBITDA margin of 4.4% reported in 1H2019 with its possible improvement to 5-6% throughout 2020). That compares to 0.4x EV/Sales and 5.7x EV/EBITDA 2021F, where Magnit currently trades. At the same time, should we assume that Magnit brings Dixy segment’s margins to its own levels (~7% currently), considering the potential synergies, the implied EV/EBITDA of Dixy is just 4.4x. Given that, we consider the transaction being value accretive for Magnit.
No change to 2021 guidance and no risk for dividends. At this stage Magnit reiterated its 2021 guidance published in February as well as 2021-25 longer-term targets. We note that the deal might temporary move Magnit’s net debt / EBITDA into 1.5-2x area, on our estimates vs 1.1x at YE20 and 1.5x considered as comfortable level of the company. Considering that, we would expect Magnit’s dividend story to remain intact – the company has indicated that the transaction would not limit Magnit’s dividends capacity going forward.
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The contents of this document have been prepared by Joint Stock Company “Alfa-Bank” ("Alfa Bank") as Investment Research within the meaning of Article 36 of Commission Delegated Regulation (EU) 2017/5...