EUROPE: Food retail sector set for consolidation - analyst

By just-food.com | 12 October 2010

Europe's food retail industry is set to see the return of mergers and acquisitions, analysts at J.P.Morgan Cazenove said today (12 October) as they started their coverage of the sector.

In a report covering 12 European grocers from Carrefour and Colruyt to Ahold and Tesco, Matthew Truman and Paul Diamond argued retailers had to respond to moves from food manufacturers that are driving scale and broadening their global reach.

Truman and Diamond said "initial overtures" were starting to be seen and added Wal-Mart's offer for South African retailer Massmart Holdings was "indicative of the trend that will likely continue".

"The disposal of Carrefour's assets in Asia will likely follow in the coming months and the prospect of some US and Eastern Europe assets becoming available as trading continues to weaken may heighten this trend further. We would also highlight Carrefour and Metro's food retail operations in Eastern Europe as opportunities for larger scale company acquisitions," the report read.

"We believe saturated competition in some markets and the motivation to increase exposure to emerging markets in the wake of stagnant Western growth will likely drive the return of the M&A theme. Being clear, we do not expect private equity to be material players given the scale of the current market incumbents and the synergies that scale brings, rather we expect industry consolidation."

Truman and Diamond's coverage started with a "positive outlook" on the European food retail sector despite the recent "out-performance" of the sector's shares.

"We believe that despite an 8% relative out-performance year-to-date, valuation metrics remain skewed to the upside whilst the sector has yet to benefit from the cycles of inflation, M&A activity, increasing emerging market exposure and a bounce in very visible growth trends and therefore positive relative earnings revisions," the analysts wrote.

"The bull case for food retailers over other consumer staples but most interestingly food manufacturing looks compelling. We believe that it will be the sub-scale, mid-cap manufacturers lacking in emerging market exposure who will generally bear the brunt of the underlying supply chain cost inflation and in the wake of increased own-label penetration, enhanced vertical integration and stagnant consumer volume growth it will be the branded investors who will have to invest to maintain volumes, shifting power to the food retailers."

Ahold, Carrefour and Casino were three of the six retailers rated 'overweight' by the analysts. Booker, Metro Group and Tesco made up the six.

Colruyt, Jeronimo Martins, Morrisons and Sainsbury's were rated 'underweight', with Delhaize and Sonae set as 'equal weight'.

Sectors: Mergers & acquisitions, Private label, Retail

Companies: Carrefour, Ahold, Tesco, Colruyt, Massmart, Casino, Metro Group, Jeronimo Martins, Morrisons, Sainsbury’s, Delhaize

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