OREANDA-NEWS. November 30, 2009. X5 Retail Group N.V., Russia's largest retailer in terms of sales (LSE ticker: “FIVE”), today announced that following the approval of its Supervisory Board, it has signed an agreement to acquire 100% of the business and assets of Paterson supermarket chain ("Paterson") from a holding company CorpInvest Inc. Regulatory approval for the transaction was received on 27 October 2009 when the Russian Federal Anti-Monopoly Service granted its unconditional consent. X5 expects to complete the transaction by mid-December 2009.

Paterson is a non-public supermarket chain of 82 stores located in Moscow, the Moscow region, St. Petersburg, Kazan and other cities of European Russia and Urals. Net selling space totals approximately 65 thousand sq.m., while total space amounts to 145 thousand sq.m., approximately 20% of which is owned.

The transaction will be structured as a 100% payment in cash for equity and full assumption of Paterson's debt. In accordance with the agreement, equity value totals USD 189.5 million. Paterson's net debt stands at approximately USD 85 million. X5 plans to finance this purchase from its operating cash flows.

Lev Khasis, X5 Retail Group CEO, commented:

"The acquisition reinforces X5's number one position in supermarkets and adds high quality locations in key geographic markets with strong demographics for this format. We see substantial scope for raising sales density and profit margins of the acquired stores by rebranding and realigning the value proposition and leveraging X5’s operational scale, distribution infrastructure and efficiency programs. This is an excellent strategic and operational fit for X5 and offers attractive value for our shareholders."

Business Rationale

Strategic Fit

The acquisition of Paterson will strengthen X5's positions in supermarket format by securing high quality locations in strategically important regions, including Moscow and St. Petersburg. X5 expects that the acquisition of Paterson will increase its supermarket store count by approximately 25%.

Operational Fit

As most Paterson stores are highly compatible with X5's format and geographic requirements, X5 expects a smooth and rapid integration process. Based on preliminary estimates, X5 plans to integrate 52 Paterson stores as supermarkets under the Pererkrestok brand, and 30 smaller stores as soft discounters under the Pyaterochka brand. A few stores are under review with regard to X5’s financial criteria. While X5 will need to close Paterson stores temporarily for rebranding and IT systems upgrades, it expects to finalize the integration by mid-2010.

Benefits of X5's operational scale, distribution infrastructure and efficiency programs. Virtually all of Paterson stores are accessible by X5's distribution network, which will enable an increase in Paterson's supply centralization level from the current 0% to over 50% after the stores are integrated. This, combined with the integration and centralization of other vital functions, including purchasing, IT and HR, should enable significant improvement in Paterson's financial performance.

Financial Upside

Improvements in sales density, EBITDA margin and positive cash flow generation. X5 sees significant scope for raising sales per square meter at the acquired stores from the current level of RUR 185,000 per annum on average (including VAT). X5 also plans to drive improved profitability through integration and efficiency programs. While X5 will invest gross margin into customer loyalty in order to retain customers and support the rebranding of Paterson stores, it expects that synergy gains will already drive improved EBITDA margin contributions in the second half 2010. Altogether, the deal is expected to strengthen X5's cash flows thanks to the healthy cash generating capacity of supermarkets and expected synergies from the integration. X5 expects total annualized synergies to positively impact X5's operating cash flow by approximately USD 50 million annually starting from 2011.

Paterson Overview

Paterson is a non-public supermarket chain of 82 stores located in Moscow, the Moscow region, St. Petersburg, Kazan and other cities of European Russia and Urals. Net selling space totals approximately 65 thousand sq.m., while total space amounts to 145 thousand sq.m., approximately 20% of which is owned. In addition to 82 stores in operation, Paterson has a pipeline of four committed stores with preliminary signed lease agreements and one land plot with a long-term lease. 18 additional stores operate under the Paterson brand in Siberia pursuant to franchising agreements (revenues from these stores are not consolidated by the company). Paterson does not have any logistics infrastructure. The company’s headcount totals approximately 3,800 employees, of which 90% are store personnel and 10% work in the company's headquarters.

Paterson's net sales for the 12 months to 30 September 2009 totaled RUR 10,968 million. Its EBITDA for the 12 months to 30 September 2009 totaled RUR 815 million for an EBITDA margin of 7.4%*. Paterson’s net debt stands at approximately RUR 2.5 billion (approximately USD 85 million).