Carrefour to sell 80% of its Chinese operations to Suning.com for $705 mn

Shares in France's Carrefour rose on Monday after it became the latest Western retailer to retreat from the Chinese market as fierce competition from domestic rivals and a growing online market puts pressure on foreign firms.

Investors welcomed a long-awaited all-cash deal struck at what analysts said was a good enough price in view of Carrefour's falling sales and operating losses in China.

Carrefour, which has been in China since 1995, said in a statement it had agreed to sell 80 per cent of its Chinese operations to electronics retailer Suning.com for 620 million euros ($705 million) in cash.

Carrefour follows other big-name Western retailers such as Tesco Plc and Walmart Inc, which have sold stakes to domestic partners, and Amazon.com Inc which plans to shut its online store in China next month.

German wholesaler Metro AG, which has 93 stores in China, is also looking to sell its China unit amid a wider company restructuring, people directly involved in the matter have told Reuters.

A source told Reuters that Suning had been interested in both Metro and Carrefour China businesses, compared the two, and found Carrefour China cheaper.

A deal could see Metro's China business valued at $1.5-$2 billion, Reuters previously reported.

Carrefour, Europe's largest retailer, has spent years trying to fix its business in China where its 2018 sales fell 5.9% to 4.1 billion euros and its operating loss was 32 million euros.

GOOD VALUATION

The agreement with Suning values Carrefour's China operation, including debt, at 1.4 billion euros ($1.6 billion), with options to sell the remaining 20% stake if Carrefour decides to exit entirely.

By 0811 GMT, Carrefour shares were up 1.5% at 17.25 euros, after opening up 2.5 percent.

Carrefour China, which operates 210 hypermarkets and 24 convenience stores, had net sales of 3.6 billion euros and earnings before interest, tax, depreciation and amortisation (EBITDA) of 66 million euros in 2018.

A 1.4 billion euros enterprise value would value the business at multiples of 21 times EBITDA, which was "very good", Bernstein analysts wrote.

"This is a good move by Carrefour allowing them to focus on their core French business, whilst keeping a stake in the Chinese business, keeping some visibility on what is happening in the fastest moving grocery market," Bernstein added.

They expected "a 3-4% earnings upgrade from the removal of China losses and lower interest charges"

Carrefour, which faces tough pressure in France from rivals such as Leclerc or discounters like Lidl, is in the midst of a five-year restructuring plan to boost group sales and profits.

ONLINE GROCERS

The rapid growth of online grocers such as Alibaba Group Holding's Freshippo and JD.com has eaten into the market share of foreign retailers in China, where consumers have come to expect same-day delivery and competitive prices.

Walmart Inc sold its online shopping platform to JD.com in 2016 in return for a stake in JD.com as the U.S. retailer focused on its bricks-and-mortar stores.

British supermarket firm Tesco folded its unprofitable operation into a state-run company as a minority partner six years ago.

Suning, which is backed by Alibaba, said in a statement that the acquisition will allow it to strengthen its brand as well as boost its marketing capabilities, food quality control and supply chain management in the sector.

The deal also puts an end to Carrefour's preliminary talks to sell a minority stake in its China business to technology giant Tencent.

"The talks that have started since January 2018 for the sale of a minority stake (in Carrefour China) to Tencent are over," a Carrefour spokeswoman said, but a strategic business partnership with Tencent remained in place.

Carrefour announced a partnership last year with Tencent, which led to the opening of a store in Shanghai.

Carrefour also said at the time that Tencent and Yonghui, a retailer specialising in fresh food and small stores, could take a stake in Carrefour China.

Tencent declined to comment. Yonghui said on Monday it was scrapping talks with Carrefour on its related investment plan.