It used to be relatively easy for private equity investors to cash out of their Latin American holdings through the public equity markets. But last year, not a single Latin American-based company conducted an initial public offering and only a handful of companies undertook secondary listings.
The Buenos Aires-based private equity firm Exxel Group managed to secure a multinational buyer for its stake in the Argentine Supermercados Norte supermarket chain. And in April, when Exxel was struggling to meet interest payments on some $688 million in debt, it executed an impressive exit when it sold its remaining 49% stake in Norte to the French supermarket company Carrefour for $263 million. Selling an Argentine company last year in itself was a notable feat and Exxel’s divestment wins LatinFinance’s private equity deal of the year for its innovative structure.
Exxel bought Supermercados Norte from the Gruil family in 1996 for $440 million and intended to use it as a vehicle to consolidate the Argentine grocery business. “When we looked at the fragmentation in the supermarket industry in Argentina, it really made it quite easy to forecast convergence and consolidation,” says Martín Steinweg, managing director at the Exxel Group.
Two years later, Norte had become the largest supermarket operator in Argentina and its gross margin had improved to 30% from 19.6%, says Steinweg. “All the key indicators were there when we decided to do a partial exit in September 1998,” says Steinweg. “We wanted to capture part of the value that we had already created for investors as well as team up with a global player that could provide us with the capital and know-how to take Norte to the next level,” he explains. Exxel sold 49% of Norte to French supermarket chain Promodès in September 1998 for $411.6 million. Exxel had bought Norte for around 8.6 times earnings before interest, taxes, depreciation and amortization and sold its 49% stake for around 15.2 times earnings.
Exxel cleverly designed the sale to be part of a gradual exit. It did not want to hold a company where it lacked control, but wanted to release some value. Under the terms of the acquisition agreement, Promodès gained half the eight seats on the board but Exxel appointed the chairman, who had double voting rights. Promodès was happy with this arrangement because the financial statements and annual business plan had to be approved by a supermajority of the board. It could afford to cede some control while it familiarized itself with Norte.
This arrangement was cemented through a series of put and call options that gave Exxel control over Norte for a maximum of three years while allowing Exxel opportunities to exit the transaction. It also allowed Promodès to gradually take control. Promodès could purchase another 2% of Norte one year after closing the transaction, although Exxel was contracted to control the investment until September 2001, unless it decided to sell Norte to Promodès sooner. If Promodès bought the 2% stake, the price would be calculated on Norte’s EBITDA multiple between October 1998 and September 1999.
Exxel could sell its shares to Promodès between January 2001 and September 2001. The value of the shares would be calculated on Norte’s EBITDA for the preceding year. If Exxel did not exercise its put, then Promodès could require Exxel to sell it the shares between October and December 2002 at the same price as Exxel’s put option. “We included the put and call option, based on a formula that if we were able to achieve continued growth we could take advantage of that and have an earn-out formula while continue creating value for the investor,” says Steinweg.
But Exxel’s exit concluded more rapidly when French retailer Carrefour acquired Promodès in August 1999. Steinweig says that antitrust regulations restricted further aggressive growth by Norte. “All of our 10 follow-on acquisitions had to go through the antitrust process in Argentina, which made it very difficult for us,” he says. “It was unlikely that they would approve any more follow-on acquisitions so there were less possibilities for [Norte] to grow.”
The value of Exxel’s put option would be based on Norte’s EBITDA for the four preceding quarters. If Exxel delayed its exit another year and Argentina’s economy deteriorated further, weakening Norte’s revenues, as seemed likely, Exxel’s hard-earned value in Norte would evaporate. Exxel sold the 2% of equity in Promodès’ call option to Carrefour for $16.1 million in May 2000 but decided not to exercise its put option and negotiated to sell its remaining 49% equity stake to Carrefour for $263 million in April 2001. The Argentine crisis had eroded the value of the company but Exxel still managed to generate a 60% internal rate of return. Although an annual return of 8% might look paltry to private equity investors that previously enjoyed returns above 20%, it is remarkable for what has been one of the worst years for Argentina’s economy in decades.