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Wal-Mart de Mexico Puts Restaurant Business Up for Sale

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06/14/2013 | 04:24pm EDT

--Mexico's largest retailer to entertain bids for restaurant chain

--Sale would allow Walmex to focus more on core retail business

--Restaurant industry booms as Mexican middle class grows

(Updates throughout with market comments and context.)

   By Amy Guthrie and Anthony Harrup 

MEXICO CITY--Mexico's biggest retailer, Wal-Mart de Mexico SAB (WMMVY, WALMEX.MX), which has been struggling to reinvigorate sales at its core supermarket business, said Friday it has put its Vips restaurant chain up for sale and will consider bids from third parties.

Walmex, as the unit of Arkansas-based Wal-Mart Stores Inc. (>> Wal-Mart Stores, Inc.) is known, said in a statement that the process is in its early stages, and there is no guarantee a sale will be completed. In 2012, the business accounted for 1.7% of Walmex's nearly $33 billion in sales, and 1.6% of its $3.2 billion in earnings before interest, taxes, depreciation and amortization.

"Players in the industry have approached the company recently to express interest in Vips," said Antonio Ocaranza, a spokesman for Walmex. However, he added, Walmex hasn't decided to disclose names of interested parties.

Walmex shares barely moved on the news, with the market viewing the proposed sale as encouraging, but not spectacular.

"What people really want to see is for the stores' sales numbers to improve month-to-month," said Gerardo Roman, head trader at Mexican brokerage Actinver.

The retailer--Latin America's largest--has had a hard time getting more customers through the door as a growing number of Mexicans have been opting to make clothing and electronics purchases at department stores rather than in big-box formats. Walmex executives have talked for months about trying to improve their stores' merchandise selection and shopping experience, but so far those efforts haven't produced measurable results.

During the first five months of the year, Walmex's comparable store sales for Mexican outlets slipped 0.5% versus the same period of 2012. Mexican retail association Antad, in which Walmex is a member, reported a 0.6% gain in same-store sales for 2013 through May.

A Vips sale could help the company focus on shoring up its core retail and grocery business. Cash generation doesn't appear to be a major motivation for the sale, since Walmex had 29 billion pesos ($2.29 billion) in reserve as of March.

In addition to big-box stores, Walmex operates clothing stores, Sam's Club membership stores, high-end grocery formats and the Vips cafeteria chain. Over the years, analysts have come to view Vips as a distraction, with little contribution to Walmex's financials.

Apart from overseeing disparate formats and business lines, Walmex--Mexico's largest private-sector employer--has spent considerable time and resources to tighten internal controls since allegations emerged in April 2012 that the retailer paid bribes to speed permits for new-store openings in Mexico. Those corruption allegations remain under investigation.

The potential Vips sale is "positive news for Wal-Mart, since getting rid of a complicated and highly competitive business that doesn't represent much for the company, and receiving a chunk of change, will allow it to concentrate on what it knows best: selling groceries and merchandise at high volume and with big discounts," said Gaspar Quijano, an analyst with Mexican brokerage Vector.

Mr. Quijano estimates that Walmex could receive anywhere from MXN5 billion to MXN10 billion for Vips, within the broad range of established valuations for the industry of 0.7-times annual sales to 1.5-times annual sales. Credit Suisse suggested a narrower range of MXN4.6 billion to MXN6.7 billion.

Mexico boasts the second-biggest population in Latin America, with 112 million consumers. Steady economic growth, accompanied by more and better employment options, has been lifting more Mexicans into the middle class and boosting consumer spending in recent years.

The trend toward buying restaurant food is also growing as cultural habits change. An ever-larger number of women in the workforce, for instance, are favoring take-out options from restaurants such as Vips. Euromonitor values the Mexican food service market at more than $45 billion a year.

At the same time, Mexicans are under-served by brick-and-mortar restaurants, with a large percentage of food sales in the country still conducted on the street.

Speculation is rife as to which companies could try to buy Vips, which has 364 locales, many of which are in prime locations within metropolitan Mexico City, the economic heart of Mexico.

Both Vector and Credit Suisse doubt that Alsea SAB (ALSEA.MX), Mexico's largest operator of chain restaurants, would be interested since the company that runs Starbucks, Burger King and Domino's Pizza has leaned toward higher end casual dining brands like California Pizza Kitchen, whereas Vips operates on the lower end. An Alsea spokeswoman declined to comment.

Other possibilities market participants are batting around include CMR SAB (CMR.MX), which operates more than 100 restaurants in Mexico, including a diner chain called Wings that is similar to the Vips concept. CMR officials weren't available to comment.

Credit Suisse views billionaire Carlos Slim's Grupo Sanborns SAB (GSANBOR.MX), which is flush with cash after a MXN10.5 billion February share offering, as a natural bidder, since it would enjoy considerable scale advantages by merging the two highly similar formats. Officials at Sanborns, which operates close to 200 restaurants, weren't immediately available to comment.

Write to Amy Guthrie at amy.guthrie@dowjones.com and Anthony Harrup at anthony.harrup@dowjones.com

Stocks mentioned in the article : Wal-Mart Stores, Inc.
Stocks mentioned in the article
ChangeLast1st jan.
ALSEA SAB DE CV 0.87% 43.11 End-of-day quote.-16.44%
CMR S.A.B. DE C.V. -2.97% 4.25 End-of-day quote.0.00%
GRUPO SANBORNS SAB DE CV 0.00% 18.5 End-of-day quote.0.00%
WAL-MART DE MEXICO S A B DE C V 2.54% 37.1 End-of-day quote.0.00%
WAL-MART STORES -1.21% 98.64 Delayed Quote.7.19%
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