This was the journey of Cencosud to land in the United States market

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This was the journey of Cencosud to land in the United States market

Sunshine project. This is how they baptized from Cencosud the operation that led them this week to carry out one of the great wishes of the firm and its founder Horst Paulmann: landing in the United States.

Last Tuesday, the retailer announced the signing of an agreement with the fund Apollo Global Management, Inc. to buy 67% of its stake in The Fresh Market Holding, the American premium chain, which in recent years has been recognized as the best supermarket in the United States in the USA Today survey.

The operation, which is subject to the approval of the free competition authorities in the US -which generally takes about 30 days to approve this type of acquisition when it comes to a new player entering the market-, contemplates the payment of US$ 676 million dollars to Apollo and the option of reaching 100% of the property in the medium term.

The opportunity came at just the right minute. For years, the firm of the businessman of German origin has been seeking to enter the largest economy in America, but until now, the negotiations have not been successful.

Between 2007 and 2008, when Laurence Golborne was general manager, Cencosud was in negotiations with Winn-Dixie, which today is the fifth largest supermarket chain in the United States and the largest public company based in Florida. But the numbers did not give.

The second time was in 2012. The company made an offer for a chain that had 75 hypermarkets in upstate New York, but again the figures didn’t add up: the price difference was between 100 and 200 million.

Now everything fell into place. After difficult years due to the backpack of debts and the refinancing that the company had to do between 2017 and 2019, in 2020 Cencosud managed to strengthen its finances and set more ambitious investment goals. And in 2021 the company was already firmly on its feet to return to its expansion plan and conquer new markets.

The objective: to look for opportunities in Latin America and not give up in the effort to enter the United States. That was how Matías Videla got down to work.

fresh market

It was six months ago that negotiations began. But The Fresh Market was not the only company that the Cencosud team looked at. There were other supermarket options the company looked at, until it settled on the Greensboro, North Carolina-based company.

This was recognized by the CEO of the company, Matías Videla, in a call he had with journalists last Tuesday at 7:30 p.m., where he disclosed details of the deal. “For some time in the directory we have been looking at operations in the United States, and we found this company that meets many requirements that arouse our interest. The first thing is that it is a chain with a high percentage of sales of perishable products, which is the base of Cencosud and which also has a very similar customer experience. An important part of the DNA and culture of The Fresh Market we find very similar”, he said.

He added: “We have had many visits to The Fresh Market to meet the management and the team. It is a company that has the characteristics to compete in the American market. It is a complementary purchase to large chains such as Walmart or Tarjet, and can coexist with them with a differentiated strategy”.

The truth is that an important part of that work, and of the trips, fell on the shoulders of Matías Videla. The rest of the members of the small team that worked stealthily with him in these six months never traveled to the United States, but they did work 24/7 to get the deal off the ground (see box). Covid protocols and the benefits of remote work were part of the reasons.

The one who did travel was Horst Paulmann, who, according to those close to him, went to Miami, visited the stores and was aware of the operation until before definitively leaving the company’s board of directors on April 22 last, after having temporarily left for health reasons in February 2021.

“I cannot forget dear HP who always told me that he dreamed of having an operation in the USA”, were Videla’s words in the internal WhatsApp that he sent to Cencosud’s collaborators when he announced the news.

It was hard work, say those who knew about the negotiations. And Videla himself recognized it. “It cost us a lot to close it,” he said, but they finally reached an agreement and the numbers, this time, did show up. The participation of JP Morgan, who acted as financial advisor for the operation, from its investment area JP Morgan Securities LLC, was key in the negotiations. The participation of the Carey law firm, which provided legal advice, was also decisive.

The stealth of the Paulmann brothers
Those who knew about the negotiations say that Horst Paulmann’s three eldest sons -Heike, current president of the company, Manfred and Peter- supported from the first minute the plan to land in the United States through the purchase of The Fresh Market.

“Both Heike, Manfred and Peter are very happy with this achievement and have supported the idea from day 1,” Matías Videla also mentioned in his message to the company’s workers.

The friends and close friends of the Paulmann brothers never imagined what they were up to. A person from the environment says that Manfred is always very reserved with business matters, but that he called attention to the fact that nobody suspected anything of what he was up to.
On Tuesday, after the news was known, the eldest of the Paulmann brothers received congratulations from his friends, the vast majority of whom were from the German School of Santiago, on his WhatsApp.

Although today each one has different roles in the company -Heike is the president, Manfred is director of the holding company and president of Cencosud Shopping Center and Peter is director of the latter- those who know them say that since their father temporarily left the Cencosud board in February of last year, the three act almost as a block, consult everything and work closely together.

The three traveled to the United States to learn about the operation. They toured stores and held meetings with The Fresh Market executives to confirm live the similarities in culture, customer experience and management.

There are different versions about what the role of each will be from now on. While some are betting that Manfred would become more involved in the deal, given his experience in the convenience store business (he owns Maxi K and Breti) and in the restaurant business where he participates with Caprioli, sectors that are part of the new portfolio of The Fresh Market projects to diversify its value proposition, others affirm that the three work very closely together and that it is most likely that they will continue operating that way.
What everyone agrees on is that the figure behind the deal, and what is to come, is undoubtedly Matías Videla, who is currently traveling outside of Chile.

Videla, Rivera, Ostenrieder and Astudillo: the petit committee

The silence of an agreement of these characteristics drew attention. No one expected that less than a week after announcing the purchase of the Giga supermarket chain in Brazil, Cencosud would deal such an important blow to grow through acquisitions.

Everything was kept strictly confidential. Matías Videla only worked on the deal with three executives: Sebastián Rivera, corporate manager of Legal Affairs; Inés Ostenrieder, the company’s CFO, and Fredy Astudillo, the firm’s corporate accounting manager. They were the only ones who were part of the petit committee that carried out the deal from inside the company.

The three are part of the hard core of trust formed by Videla since he assumed the corporate general management of the company on December 1, 2019. Rather than looking outside the company, the commitment of the CEO, who has been in the company for more than 24 years, firm, was to empower collaborators who were already part of Cencosud to give them more responsibilities.

This is the case of Sebastián Rivera, who has been in the retailer for more than 16 years. He took over as Corporate Legal Affairs Manager in August 2020 and previously served as Attorney and Secretary of the Board of Directors and Compliance Officer.

The CFO, Inés Ostenrieder, meanwhile, took charge of the finances of the holding company in May 2021, a position that had been vacant for several months at Cencosud, after working since March 2018 as an advisor to the company’s board of directors, a position since which was progressively assuming more and more responsibilities in the financial area.

A graduate in political science from Monash University, she has a master’s degree in applied finance from Kaplan Business School in Australia. Before joining Cencosud, she worked in commercial banking in Australia, in corporate affairs for global consumer companies, such as the tobacco company Philip Morris International.

Meanwhile, Fredy Astudillo has been the corporate accounting manager of the holding company since 2001.

What is The Fresh Market?

Market reactions to Cencosud’s announcement have been contradictory. While retail analysts from risk rating agencies and investment banks look favorably on the operation and many call for overweighting the stock in their portfolios, the retailer has plummeted in the stock market it plummeted the first two days after know the news.

The Fresh Market is a company founded in 1982 by Ray Barry and his wife Beverly, who after a trip to Europe were enchanted by the markets of fresh and excellent quality products that proliferate in that continent and decided to try their luck with that concept in the United States. . They opened their first store in Greensboro.

In 2010, the couple decided to open their company to the stock market and in 2016 they sold their stake to Apollo Global Management Inc., which bought almost all of the company’s shares, which meant that The Fresh Market was delisted. The Barrys still retain a small stake in the company.

Today the chain already has 160 stores spread over 22 US states, but whose position is concentrated in four: Florida (47 stores), North Carolina (21), Virginia (13) and Georgia (12).

It has 10,159 employees and obtained annual revenues of US$1,933 million in 2021. Its most direct competition is Whole Foods, the Austin, Texas-based chain that has more than 460 stores spread across the United States, Canada and the United Kingdom, which in June 2017 it was bought by Amazon for US$13.7 billion.

70% of The Fresh Market’s products are perishable, while in traditional supermarkets this figure reaches 35%, and 15% is prepared food, a commitment that has been the key to the company’s growth and profitability. The penetration of the online channel is 5%, through a partnership with the company Instacard.

According to Cencosud’s calculations, if the company had been part of the holding company in 2021, it would have represented 12% of its income.

To pay the US$676 million, Cencosud announced that 60% will be with cash from the company, while the remaining 40% will be via short-term bank debt.

Currently, The Fresh Market has debts of US$860 million, which should drop to less than US$600 after the purchase.

Among the doubts that remain in the market is the high price of store leases, since unlike Cencosud, 100% of The Fresh Market locations are leased. According to a retail executive, the interest on the debt, added to the cost of the leases, will imply a cost of US$200 million a year for Cencosud. And the Ebitda of The Fresh Market is less than that figure: US$ 154 million.

Another question is how Cencosud will be able to improve The Fresh Market’s Ebitda margin, which is currently between 10% and 11%, in circumstances where in the industry these generally range between 5% and 8%.

“I don’t know what else they can contribute. The normal thing is to buy a poorly managed chain to improve it, but The Fresh Market has extraordinarily good margins for the industry”, says a seasoned executive of the sector.

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