Russian banking group #VTB has sold its 11.82 percent in largest domestic food retailer #Magnit to Marathon Group founded by businessmen Alexander Vinokurov and Sergey Zakharov. The deal value is not disclosed but the stake is estimated at RUB62.5bn based on the price for Magnit shares at close of business on 23 May 2018. The deal, structured as repo, was both equity and debt financed.

Following the sale, VTB together with the other shareholders will continue to develop Magnit’s business and maintain its corporate governance at a high level typical for public companies, the bank said in a statement.

According to Mr. Vinokurov, Marathon Group was interested in the retail sector from the very beginning. He believes Magnit is underestimated at the moment and, with certain efforts from management and shareholders, the retailer can return to number one position on the Russian market and regain its fair value.

 

Who is the new Magnit co-owner?

Marathon Group was founded by Alexander Vinokurov in 2017. Its focus is pharmaceuticals, FMCG and retail, transport infrastructure and agriculture.

Marathon Pharma, a part of the group, includes production facilities, laboratories and distributors as well as drugstore operator Mega Pharm (which runs drugstore chains A-Mega, Yes, I am healthy and Azbuka Life). Moreover, the group has reached an agreement with government corporation Rostekh to bring several pharmaceutical assets under Rostekh’s umbrella.

Marathon Sport, another subholding in Marathon Group, runs sports assets, i.e. Section Club, IQSport and Marathon-Tula Cycling Team comprising professional athletes.

As soon as the stake in Magnit was acquired, Marathon set up is a third subholding, Marathon Retail.

 

From private to state-controlled

The Magnit retail chain was founded by Sergey Galitsky back in 1994, as a distributor of household cleaning products. First stores were opened in 1998. Mr. Galitsky remained the key owner and manager of the retailer. By 2006, it comprised as many as 1 500 stores and had an IPO: it sold 19 percent of shares for $368m. In 2013, Magnit became the largest retailer in Russia by turnover leaving behind its main competitor, X5 Retail Group which runs Pyatyorochka, Perekryostok and Karusel chains. Then, Magnit became the champion for the first time in its 15-year history.

However, problems emerged for the retailer in 2016. Its profit dropped for the first time in its history and it became second after X5 Retail Group. Magnit financials continued to worsen in 2017 when its net profit plummeted 34.7 percent by the year end. Naturally, this made investors unhappy and Magnit shares lost almost 50 percent in price by April 2018 versus February 2016. At that time, X5 Retail Group outperformed Magnit by capitalization for the first time in seven years.

Due to this discontent of investors and, reportedly, general fatigue, Galitsky made an emotion-driven decision to sell the company. In February 2018, he announced the sale of 29.1 percent to VTB Capital for RUB138bn, thus keeping only 3 percent in the retailer.

Following this step, Galitsky explained at a press conference this was a difficult decision keeping in mind that he founded the company. But life goes on, and nothing lasts forever. The businessman commented investors had a different view of the company’s future, and he is not going to ‘go against the flow’. In his turn, VTB President Andrei Kostin noted it was time for the Magnit founder to sell the company to concentrate on kids football development. At that time, Kostin mentioned VTB would not remain a Magnit shareholder forever but at least for two or three years.

VTB plans to use its stake in Magnit as part of cooperation with Post of Russia to create a new largest player in the retail market. Currently, Post of Russia runs 42 thousand branches in Russia which is 2.5x more than that of Magnit which is also the largest player by the number of retail stores in the country.

The news spurred negative market sentiment. When the deal between VTB and Magnit was announced, the retailer’s shares lost nearly 8 percent at the Moscow exchange to RUB4 473 per share and its GDR dropped 10 percent to $17.64 in London. One of the reasons behind this was the fact that Mr. Galitsky resigned from the retailer’s management. Moreover, this step denotes the strengthening of state control over the economy, said Alexander Abramov, an analyst on institutions and financial markets at    the Russian Presidential Academy of National Economy and Public Administration.

 

Long-standing allies

Vinokurov and VTB have a long-established history of cooperation. Nearly ten years ago, in 2009, VTB Capital (investment arm of VTB) and TPG Capital (an investment fund headed by Vinokurov) bought 35.4 percent in Lenta retailer from its founder Oleg Zherebtsov. Later, in 2011, TPG and VTB together with the EBRD acquired a controlling stake of more than 85 percent in this retailer. Consequently, after an additional share issue, the stake of TPG was diluted to 34 percent and that of EBRD to 7.4 percent. VTB also cut its share gradually to only 4 percent by 2015. Reportedly, the latter still owns about 5 percent in Lenta.

 

Back to leading positions

In 2016, when Magnit lost its leading position, Galitsky announced the first place “is not for us”. But with the new shareholder, the company’s strategic vision has changed and now it is targeting to become a leader again. Khachatur Pombukhchan, Magnit general director, announced last week the company would strive to return to number one position by revenue and net profit.

Magnit started to work on a new strategy as soon as its stake was sold to VTB. The new shareholders succeeded in hiring a former top manager of the main competitor, Olga Naumova from X5 Retail Group. Pombukhchan believes Magnit already has “the best team” and the company is going to continue attracting talents, no matter where they come from.

What the market needs is growth, new store openings, like-for-like and an aggressive approach, Galitsky was quoted as saying in February when the deal with VTB was announced. Magnit lags behind competitors in this respect. For example, X5 Retail Group reported its revenue growth by 25 percent in 2017 and that of Lenta went up 19 percent while Magnit managed to increase its revenue only by 6.4 percent. Moreover, Magnit was the only retailer in the top3 that faced a reduction in like-for-like sales and net profit.