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Metro announced the sale of its hypermarket operations in Eastern Europe to Auchan for €1.1 billion. This move gives Auchan an undisputed dominant position in the hypermarket channel in Eastern Europe, but the gains for Metro could prove to be short-lived.
Once the acquisition is completed, most likely in 2013, Auchan will become the largest hypermarket operator in Poland. Auchan should also further extend its leadership positions in Russia and Ukraine, and could leapfrog Carrefour to reach second place in Romania.
As an unlisted company with a prudent financial approach, Auchan has a low level of debt. The value of the transaction, at €1.1 billion for the 91 Real hypermarkets, will not endanger its cash-flow. Based on the estimated sales for 2012, Auchan should gain around €2.7 billion in additional sales in Eastern Europe, which indicates that the value-to-sales ratio is favourable for Auchan. Despite the lure of the Turkish market, Auchan declined to include Real operations in Turkey as it prioritises investment in the markets where it is already present.
Metro had planned for several years to divest its Real division but failed to find a suitable buyer. However, the disappointing performance of its Media Markt/Saturn electronics and appliance specialist chain in Western Europe in 2012, strongly hit by the low level of consumer confidence in the Eurozone, made the disposal more urgent as the group’s profits plunged. This could have given Auchan an advantage in negotiating a deal.
Nevertheless, with the deal secured, Metro’s shareholders will be pleased that the proceeds of the sale can be invested in reviving sales and boosting profits in Germany and Western Europe, although this will remain an arduous task.
Metro’s predicament is reminiscent of Carrefour’s. Both companies, which faced declining share prices and stagnant results in their domestic markets, have chosen to sell assets in emerging markets and refocus on improving their domestic businesses. However, while this may appease investors and improves short term profits, such a strategy will undermine their future capacity to benefit from growth opportunities in emerging markets.
Unlike Carrefour, however, Metro will not actually fully exit any market, as its cash-and-carry operations remain intact in emerging markets. This will continue to provide strong growth potential and so despite selling its hypermarket operations, Metro’s move will not mark as significant a retrenchment as Carrefour’s recent wave of disposals has.