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Carlyle’s M&A Hunt Targets Middle Class: Corporate Brazil

2 October 2012

(Bloomberg) October 2, 2012 – Carlyle Group LP (CG), the U.S. private-equity firm that acquired three Brazilian retailers in the past year, is hunting for more after investing $1.7 billion in the country since 2009.

“Our focus will keep being companies related to consumption, rising income and the growing middle class,”Fernando Borges, head of the Washington-based firm’s South American buyout team, said in an interview in Sao Paulo. He said he sees a “great need for capital and space for consolidation.”

JPMorgan Chase & Co. (JPM) and local private-equity firms BTG Pactual Participations Ltd. and GP Investments Ltda. are also searching for consumer-goods targets after Brazil President Dilma Rousseff expanded access to credit to fuel growth in the world’s second-largest emerging market. Of 80 deals announced in the past year involving private-equity firms, 34 were consumer-related, according to data compiled by Bloomberg.

Retail sales will grow at a faster pace than the economy, said Borges, who was hired in 2008 to build Carlyle’s Brazil office. Retail sales through July beat economists’ forecasts and surged 8.8 percent even as this year’s economic growth is expected to slow to 1.57 percent, the median estimate in a central bank survey released this week, from 2.7 percent last year.

Carlyle announced last month it would acquire 60 percent of Estok Comercio & Representacoes Ltda., owner of the Tok&Stok brand, Brazil’s largest furniture retailer. In March, it bought an 85 percent stake in Ri Happy Brinquedos Ltda., Brazil’s largest toy retailer, which took over its smaller rival, PBKids Brinquedos Ltda., in June.

Durable Goods

Retail stocks have outperformed the benchmark Bovespa index this year after Rousseff cut taxes on durable goods from cars to furniture and pressured banks to cut interest rates on credit cards. The central bank has reduced borrowing costs by 500 basis points since August 2011 to a record low of 7.5 percent. The consumer-discretionary sector posted the best performance in the MSCI Brazil Index (MXBR) in the third quarter, gaining 20 percent, compared with a 9 percent increase for Brazil’s Bovespa index.

While Carlyle didn’t disclose terms of the deals, Borges said the firm has spent $1.7 billion in the past three years in Brazil. His team made its first investment with the takeover of CVC Brasil Operadora & Agencia de Viagens SA, the largest tour operator in Latin America, in January 2010. A deal for a controlling stake in health-insurance brokerage Grupo Qualicorp, valued at $1.2 billion, followed in September of that year.

JPMorgan’s Gavea

JPMorgan’s Gavea Investimentos Ltda., the New York-based company’s private-equity arm in Brazil, sees the same opportunities, announcing last month it would purchase 30 percent of Chilli Beans, the biggest sunglass chain in Brazil, for an undisclosed amount, according to an e-mailed statement.

On Sept. 20, BTG Pactual Participations, the private-equity arm of Sao Paulo-based Grupo BTG Pactual, announced the purchase of an additional stake of about 30 percent of Leader Participacoes SA, a furniture and clothing retailer. BTG previously bought about 40 percent of the Rio de Janeiro-based company in May.

BTG completed the Leader acquisition only after outbidding GP Investments, according to two people with direct knowledge of the matter, in a sign that competition for takeovers in the industry is heating up. BTG paid 990 million reais ($489 million) for 70 percent of Leader, valuing the company at about 10 times its 2011 earnings before interest, taxes, depreciation and amortization, said a person familiar with the deal. BTG and GP declined to comment.

Tok&Stok Sales

Carlyle acquired its 60 percent stake in Tok&Stok for about 700 million reais, according to a person with direct knowledge of the matter who asked not to be named because the figure hasn’t been disclosed. Tok&Stok’s total sales were about 1 billion reais last year, according to a company statement.

On average, publicly traded retail companies in Brazil are valued about 14 times Ebitda in the past 12 months, according to data compiled by Bloomberg. That compares with a ratio of 10.7 for companies included in the benchmark Bovespa index.

Rothschild, the family-owned bank, is trying to sell a minority stake in SBF Group, owner of the Centauro sports-equipment chain, which has an agreement to open stores in Brazil with Nike Inc., according to four people with direct knowledge of the matter. GP Investments is one of the investors looking at the company, two of the people said.

Rothschild declined to comment. SBF Group said they are studying the possibility of having a minority private-equity partner.

Household Concern

Much of the increase in consumer spending has been financed with credit, with consumer loans rising 13 percent to 678.8 million reais in August, the central bank said on Sept. 26.Default rates have also climbed, holding at a three-year high of 7.9 percent in August.

“We still see opportunities, but we’re concerned about the increase in household leverage and in the delinquency rates,”Patrice Etlin, a managing partner for Latin America at Advent International Corp., said in an interview. “Both could reduce or slow the growth in family consumption in Brazil.”

Advent, the Boston-based buyout company, bought Viena, Brazil’s largest casual-dining chain, in 2007 for more than $300 million, and made it part of its International Meal Co Holdings SA. (IMCH3) Advent also acquired a stake in Quero-Quero, a furniture and home-appliances retailer, in September 2008 to capitalize on sales to home builders.

Itau Unibanco Holding SA’s Kinea private-equity firm is also seeking to acquire stakes in consumer-related companies, according to an e-mailed statement yesterday. They have 1.3 billion reais to invest and are targeting seven or eight deals, director Cristiano Lauretti said in the e-mail.

‘Positive Push’

B2W Companhia Global do Varejo lead gains among retailers included in the benchmark Bovespa index today, rising 1.9 percent to 11.94 reais at 12:55 p.m. in Sao Paulo. Lojas Renner SA rose 1.3 percent to 70.66 reais, while Lojas Americanas SA advanced 0.7 percent to 16.32 reais. The Bovespa was down 0.6 percent to 59,224.69.

Solange Srour, chief economist at BNY Mellon Arx Investimentos in Rio de Janeiro, said retail companies will maintain a “good growth pace” as access to credit improves.

“The worst is over and the outlook is for delinquency rates to fall,” Srour said. “The outlook is for incomes to grow less than last year, but it continues to be a positive push for retail sales.”