Grupo Comercial Chedraui (CHDRAUIB.MX, $4.27 USD) Completes Purchase of the 36 Store Chain Tiendas de Descuento Arteli.

The purchase, priced at roughly 3X EV/EBITDA, represents an example of the fiscal discipline involved in the expansion of Chedraui throughout its competitive markets. In addition to the 36 stores under the banners Arteli, Arteli Express and Ak√° Superbodega, the purchase brings with it a fairly significant distribution center in Tampico, MX as well as a large bread plant, tortilla plant and meat processing facility. Post close, Chedraui becomes the market share leader in the Tampico metropolitan region of Mexico. Net sales of roughly $248 million USD were reported by Arteli for their fiscal year and will serve to increase the overall sales for Chedraui in 2023 by roughly 2%, before taking into account any inflationary tailwinds. An overall store count in Mexico for Grupo Chedraui increases by 10% heading into 2023.

The transaction is being funded entirely from cash balances on the corporate account and no additional financial indebtedness will result.

Net accretion was not stated in the press release: taking into account an assumed EBITDA margin of perhaps 7.5% on sales for Arteli and factoring in the overall store and employee count, it could range as high as 2% on a full fiscal year’s integration. I assume that the EBITDA to be earned on Arteli in 2023 may fall between $18 million-$21 million USD.

There will be some benefits for other Chedraui stores in the Tampico and adjacent states of MX; better utilization of the Arteli meat and bread processing facilities will help to maintain margins in an inflationary environment.

The acquisition is evolutionary for Grupo Chedraui.

On a net/net basis, the deal, while not transformative, continues to demonstrate the runway potential for Chedraui; management continues to find and complete bolt-on or tuck-in store purchases that are immediately profitable without having to resort to the overuse of the hyperbolic word “synergy” in press releases. I consider this a smartly executed transaction; having picked through the details as presented, it represents exactly the sort of purchase that a financially strong regional player should be making. Arteli will benefit from the larger purchasing power offered by Chedraui and the net result should be increased market share in the Tampico-Veracruz markets for the combination.

Arteli, more likely than not, is primed to become considerably more profitable as a division of Chedraui than it would be as a competitor. Without a financial expense to offset the EBITDA, what seems on paper to be modest accretion becomes disproportionately fatter on the bottom line. Ex-integration costs, the Mexican division will see a pickup in earnings for 2023. Finally, this expands the footprint for the real estate rental and leasing operations in Tampico.

A tuck-in purchase of one’s primary competitor in a steadily growing retail market at a highly favorable valuation should, in all likelihood, result in the valuation of Arteli moving towards a 3.5x EV/EBITDA multiple once on the books of Chedraui. If, as I believe, food inflation will continue to be an issue for at least another year, the push by investors globally to demand greater exposure to pure play grocers could potentially result in a valuation expansion for Chedraui maybe to as much as 4X.

Surf’s Up.

Of late, I was beginning to doubt that there was any talent remaining in global retail. The competitive landscape is littered with failed executives unqualified to work as restaurant bussers, so far below the level of mediocrity are they. The lack of executive acumen has pulled an entire sector down to the incompetence mean; retail seems less like a private venture, more like a government bureaucracy, regurgitating previously failed concepts upon a new generation of beguiled investors. What is typically absent in corporate offices of retail ventures is fiscal discipline. So, when a regimen for growth is strictly adhered to, I tend to get more a bit more amped.

This single transaction, reported almost as an aside and buried deep under year-end bad news from most other retailers, adds as many stores to the overall corporate footprint as Grupo Chedraui can typically hope to build over a full year’s internal growth, at an all in cost of less than three months earnings.

Tiendas de Descuento Arteli was a highly disciplined steal of a deal; not large enough to result in anti-trust issues, cheap enough to be paid for using cash on hand, concentrated enough that it cements dominance in an important grocery market within Mexico. Not transformative; certainly an accelerant.

You’re gonna need a bigger boat.” (Roy Schieder, JAWS)

Pieces of the puzzle are coming together; I like what I see. My initial supposition, a year back, was that this was to be a nice easy whitewash surf, one that any Barney could hop astride. Increasingly, Chedraui appears to be riding a much deeper green wave and I might want to take out a longer and narrower board to this party.

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