Metro may offer control to investor to fund expansion
Intends to raise $ 300-400 million as German parent unwilling to infuse fresh funds
Metro Cash & Carry is looking at raising $300-400 million from a strategic investor after its German parent Metro AG declined to infuse fresh funds for its expansion in India.
The company is willing to offer control and has asked merchant bankers J P Morgan and Goldman Sachs to identify prospective investors, though no detailed negotiations have started with anyone for the $2 billion valuation it expects, sources said.
These bankers have been looking for investors since January when the Indian operations finalised their cash requirement for expansion and taking on the competition, with the help of Bain & Co.
At least one company which was among the earliest to have been sounded out mentioned a valuation figure of not more than $700-800 million.
A Metro AG spokesperson said it was reviewing ’strategic options’ with potential partners to enhance Metro’s wholesale capacities and accelerate business development in India but would make no further comment.
Sources say that the parent company decided not to fund Metro Cash & Carry any further primarily because it might have a substantial impairment on its books because of the adverse impact on its business in Ukraine and Russia where many stores were closed or destroyed. That is why the parent company is unwilling to invest in India.
But, sources say that Metro Cash & Carry had informed the parent company that it needed to expand its operations from 31 stores currently in India to over 100 stores, expand to many more cities, open up more dark stores, invest in technology, and expand its e-commerce online business which already accounts for 20 per cent of its revenues. It also would need money to take on tough competition from other players such as Jiomart, Udaan, and Amazon.
Sources say Metro Cash & Carry also has to combat many of the big players who are selling their products at huge discounts and focusing on topline growth by selling large volumes of products such as oil to shore up revenues.
Sources say the money Metro needs would be required in three to four years, that is, $100 million every year. Those involved in the process say that the asset would attract most of the key e-commerce players in the country. The names going around include Reliance and the CP group of Thailand (which has started cash and carry in India but is a small player).
Sources say Metro Cash & Carry expects attractive valuations from a prospective investor as it is about to hit revenues of $1 billion, has been Ebidta-positive for over four years, and is expected to see a growth of around 35 per cent in EBIDTA this financial year ending in September. This, while other e-commerce players are in the red.
“We have been profitable since 2018, now continuously for four years in a row. We have seen a big jump (+57 per cent) in our EBITDA for FY21 vs FY20. Our e-commerce business in FY21 grew by 5.7 times vs PY and we have successfully opened three new stores in India in the last nine months,” said a Metro India spokesperson.
Those in the know say that the process of engaging with an investor will take a while. No direct discussions with possible investors have yet taken place. The merchant bankers mandated by the parent company are expected to identify investors, after which negotiations could take a while.
“While we are open to an investor taking a majority stake, it will all depend on what its strategy is - whether it wants to be a minority player or take control. We have not reached that stage,” said a source aware of the process
Metro Cash & Carry has been operating in India for 19 years. It was compelled to change its business model by shifting to a digital online platform during the pandemic.
It shifted from a brickand-mortar player to an omni channel operator, delivering products at kirana shops’ doorsteps. This brought the company into direct conflict with major players such as Jiomart, Udaan, and Amazon who were also focusing on the same retailer.