Introduction
Companhia Brasileira de Distribuicao (CBD) is a Latin American retail consortium that operates several supermarket banners in Brazil. It is currently trading as an ADR on NYSE under the ticker CBD. This article explores an interesting spin-off situation involving CBD and its subsidiary, Almacenes Exito, a Colombian grocery retailer. The spin-off presents a unique investment opportunity with a significant upside potential.
The Spin-Off Opportunity
The key catalyst for this investment opportunity is the spin-off of CBD’s stake in Almacenes Exito to shareholders. As part of the transaction, CBD shareholders will receive 4 Exito shares for each CBD share they own. The spin-off distribution is worth significantly more than the current market cap of CBD, even assuming a decline in Exito’s share price post-spin-off. This presents an attractive opportunity for investors to acquire CBD’s Brazilian retail operations and other balance sheet investments at a discounted price.
Valuation Gap and Risks
The valuation gap between CBD and Exito can be attributed to two key risks. Firstly, there is a potential sell-off of Exito stock after the spin-off, which might lead to a decline in its share price. However, the market seems to be pricing in a material discount for Exito, which presents an opportunity for investors. Secondly, there is uncertainty surrounding the valuation of CBD’s remaining assets, including its stake in Cnova, an e-commerce platform business. The fair value of Cnova might be lower than reflected by the current market price, which puts pressure on CBD’s overall valuation.
Potential Upside Scenarios
Despite the risks, there is considerable upside potential in this investment opportunity. Based on various scenarios, the upside potential ranges from 10% to 22%. Even in the bear-case scenario, the downside is well protected at current levels. The valuation of CBD’s RemainCo, which includes its core Brazilian supermarkets business (GPA) and its stake in Cnova, is estimated to be between $0.41 and $1.16 per CBD share.
Conclusion
In conclusion, the spin-off of CBD’s stake in Almacenes Exito presents a unique investment opportunity with significant upside potential. Despite the risks associated with the spin-off and the valuation of CBD’s remaining assets, the current market price of CBD offers a margin of safety for investors. It is important to carefully consider the potential sell-off of Exito stock and the involvement of Casino Group, the parent company of CBD. Overall, this spin-off situation in the Latin American retail sector is worth considering for investors looking for attractive investment opportunities.
