Diniz, Casino won’t let Pao de Acucar go easily

By Guillermo Parra-Bernal

SAO PAULO, (Reuters) – No matter what comes next, relations between the two controlling shareholders of Brazil’s largest retailer appear shattered for good.

France’s Casino Guichard Perrachon and Brazilian businessman Abilio Diniz, 74, the partners who jointly steered Grupo Pao de Acucar to top spot in Brazil’s $230 billion retail industry, are mired in their most serious dispute since they became partners in 1999.

Diniz, also Pao de Acucar’s chairman, violated the terms of the partnership when he unilaterally contacted Carrefour , Casino’s fiercest rival in France, without permission to discuss a possible tie-up, according to an arbitration suit filed by Casino last week.

As the dispute sheds light on Brazil’s most successful retail partnership, it also underlines the importance of Brazil’s retail industry to foreign investors seeking exposure to one of the world’s most successful and promising markets.

A merger of Pao de Acucar and Carrefour’s Brazilian unit could help reduce fragmentation in Brazil’s retail industry, 60 percent of which is dominated by the top 10 players. A merger would give the combined company a 28 percent market share — more than twice that of Wal-Mart Stores Inc. .

At the core of the spat, in which confidential letters and memos have been leaked to the press, is an accord between Casino and Diniz that allows the French giant to take control of Pao de Acucar through an option a year from now.

As the exercise of that option approaches, Diniz’s alleged talks with Casino’s archrival Carrefour shows that neither of Pao de Acucar’s partners have seriously discussed how they will handle a change of control, a Sao Paulo-based hedge fund manager said.

“Good partners talk, they don’t simply go to arbitration based on news reports,” the investor said on condition of anonymity.

Investors fear that the dispute could drag on for months and distract management from completing the integration of home appliances shops Globex and Casas Bahia, which Pao de Acucar bought in 2009.

Pao de Acucar stock shed 7 percent over the last month, reflecting worries over the future of the partnership.

Shareholders are wondering why Diniz opened contact with Carrefour without informing Casino, despite knowing that both French companies have been locked for years in a ferocious retailing battle.

 

“LOYAL AND TRANSPARENT”

Casino came to Pao de Acucar’s rescue years after Diniz engaged in a ferocious boardroom battle with his brothers that pushed the retailer to the brink of bankruptcy.

The family quarreled over control of the business in the late 1980s, until Abilio persuaded two of his brothers and one of his sisters to sell him their stakes in 1991.

The option between Casino and Abilio Diniz was created in 2006, when both founded Wilkes, the holding company that controls Pao de Acucar. Under the option, Casino could take control of Wilkes, which in turn owns 66 percent of Pao de Acucar’s voting stock, next year.

If it exercises its option, Casino would be allowed to name a new Pao de Acucar chairman, consolidating its grip on Brazil’s biggest retailer. Under the rules of Wilkes, neither party can enter merger talks without the consent of the other.

Casino probably entered arbitration to remind Diniz of the accord, CM-CIC Securities analyst Christian Devismes said.

Some analysts say Diniz snubbed Casino to seek better terms ahead of his possible exit as chairman next year. But a source close to the situation told Reuters that Diniz simply sounded out Carrefour to protect Pao de Acucar’s leadership from the threat of Wal-Mart and Chile’s Cencosud.

“While Casino’s option to take a controlling interest in Grupo Pao de Acucar in 2012 has been well documented, much less discussed has been the tension such option might create,” Bank of America Merrill Lynch analysts wrote in a recent report.

Casino is betting on Brazil to expand as profit prospects wane at home.

Brazil’s population is three times that of France, and its $2.1 trillion economy is 80 percent as big. Growing at 5 percent a year, Brazil could top France as the world’s No. 5 economy in less than a decade.

At first glance, Diniz, a fitness fanatic known as an aggressive dealmaker, might have to cede control of the company that his father founded in 1948; most analysts say that a deal with Carrefour looks unlikely at this point.

Whatever the result of the rift, Diniz may already be losing any future voice in a company he would no longer control.