Mexico's Liverpool paying high price for Chile's Ripley, analysts say

Mexican high-end department store chain Liverpool is paying a high price to acquire a majority stake in Chilean retailer Ripley but the deal offers an opportunity to improve operations and add value, analysts said on Wednesday.

Liverpool said on Tuesday it agreed to acquire a majority stake in Ripley for 813 billion Chilean pesos (US$1.2 billion), an offer that represents a premium of about 25 percent to the Chilean retailer's closing price on the Santiago Stock Exchange on that day.

"The implied valuation for Ripley is rather rich," Barclays said in a research note to clients. "Nonetheless, in the medium term Liverpool might be able to extract value from the Ripley acquisition, considering its track record of growth and market share gain in Mexico in over a century of being operational."

According to Barclays, Liverpool should be able to finance the acquisition by issuing debt without reaching worrisome leverage levels.

According to Barclays, Liverpool will likely finance the deal by issuing debt, resulting in net debt about 1.2 times earnings before interest, tax, depreciation and amortization, compared to about 0.8 times in the first quarter of this year. That was "still a level not to be concerned about," said Barclays.

As of the first quarter, Liverpool had net debt of about US$540 million.

For some analysts the diversity of Ripley's business portfolio, with 69 stores in Chile and Peru, and units in retail, financial services and shopping malls, makes it appealing.

"For a big actor like Liverpool a highly diversified South American retailer, with presence in Chile and Peru, is attractive," said Marcelo Catalan, head of equity research at BCI.

Additionally, analysts saw room for improvement in how Ripley's business was managed.

Ripley, which posted a net loss of around $70 million in 2015, closed its operations in Colombia earlier this year, citing a sluggish macroeconomic scenario there and a lack of opportunities to implement its original business plan.

"We have the understanding that (Ripley's) assets are rather poorly managed, which implies some potential improvement for Liverpool in the medium term," said Barclays.

BCI's Catalan said that "there is a lot of room to make Ripley's operations more profitable and generate more value."

Ripley was in talks with various companies last year about developing its business. The Mexican press had previously reported rumors about a Liverpool acquisition.

The agreement is still subject to various conditions, including regulatory approval.