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Carrefour and Pão de Açucar Negotiations

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Carrefour and Grupo Pão de Açúcar Merger

Intercultural Negotiation

Rafael Campos de Oliveira

November 2012

Contents Table


Background Information

a. Background Information of Carrefour b. Background Information of Pão de Açúcar c. Background Information of Groupe Casino 1. Situation before the negotiation 2. The proposal 3. Groupe Casino position 4. End of Negotiation 5. Future for Carrefour and Pão de Açúcar 6. Final commentaries 7. References

Carrefour and Pão de Açúcar merger

This paper will describe the negotiation to merge Pão de Açúcar, the largest retailer in Brazil, and Carrefour, the second largest supermarket chain in the world. The initial plan was to create a Brazilian super retail chain with a global presence but due to several reasons the negotiation didn’t succeed. These reasons will be presented in the following chapters, along with an analysis comparing the theories learned in the Intercultural negotiation class.

The methodology of this research was based in articles published by newspapers, containing both analysis of this case and interviews with the people involved.

Background information

BACKGROUND INFORMATION OF CARREFOUR Carrefour S.A. is a one of the largest hypermarket chains in the world – according to public information – it had more than 1395 hypermarkets at the end of 2009. Carrefour is also the second largest retail group in the world in terms of revenue, and the third largest in profit, only after Wal-Mart and Tesco. The headquarters is located in Boulogne Billancourt, France, in the metropolitan region of Paris and its operation are spread mainly in Europe, Argentina, Brazil, China and United Arab Emirates. The main global strategy of Carrefour is to have hypermarkets instead of smaller sized supermarkets. Carrefour started with a single store opened on 1 January of 1958. In 1995, there were already a chain of supermarket and it grew even more after a merger with Promodès, one of its major competitors in the French market at that time. The Carrefour group was the first in Europe to open a hypermarket, a large supermarket and a department store under the same roof, on 15 June 1963. Currently, Carrefour reviewed its situation under conditions of stagnant growth and increasing competition in France from rivals including Groupe Casino, and planned to invest €1.5 billion ($2.1 billion) to change the supermarket with the new concept of Carrefour Planet in Western Europe. Carrefour is today controlled by financial investors - the Blue Capital and Colony funds, as well as Bernard Arnault (owner of Louis Vuitton), which according to the press, would be willing to sell his shares in the group. In Brazil, Carrefour was founded in 1975 and today it is one of the major retailers in Brazil in competition with Wal-Mart, Groupe Casino/Pão de Açúcar and others.

BACKGROUND INFORMATION OF GROUPE CASINO Groupe Casino (or Casino Guichard-Perrachon) is a large French multinational corporation and the main Carrefour competitor in France (under the name Géant). In Brazil, Casino entered the market after injecting capital into the Brazilian retailer Pão de Açúcar in 1999, saving it from bankruptcy. In 2005, it bought more shares and also the control of the operations, starting in 2013.


Grupo Pão de Açúcar, located in São Paulo, is the biggest Brazilian company working with retailing of food, general merchandise, electronic goods, home appliances, hypermarkets and home appliance stores. The company is the second biggest retail company in Latin America by revenue and the second largest online retailer in Brazil. Today, the company has more than 1.800 stores throughout Brazil, divided in different store concepts:

• Pão de Açúcar (162 supermarkets); • Extra (204 supermarkets & 135 hypermarkets); • Assaí (61 stores). • Through its subsidiary Viavarejo, Grupo Pão de Açúcar 956 Stores under the Pontofrio and Casas Bahia brands.

The company is jointly owned by the Brazilian billionaire businessman Abílio Diniz and his family, and by the French Groupe Casino. Analyzing the history of the group, we can notice a large number of mergers and partnerships established, as well as how the group is present in a variety of different sectors under different names, revealing the desire to grow.

Situation before the negotiation Due to the greater competition and the stagnation of the European market, Carrefour is trying to expand even more its presence in emerging economies, such as Brazil. Even though Carrefour has been in Brazil for several years, the company recently registered losses of R$1.2 billion. As a result of this, the headquarters in France has decided to proceed carefully when financing the Brazilian operation. Analysts believe that Carrefour has higher expenses compared to its competitors especially due to the strategy of having hypermarkets instead of mid-sized shops. At this point, according to analysts, Carrefour wants to stay in Brazil and it absolutely needs new partners to inject more capital and strengthen the operations. It’s also relevant to mention that Carrefour has recently agreed to sell its Colombian business to the Chilean company Cencosud for 2 billion euros. This shows that Carrefour wants to focus its business in specifically targeted locations, especially in fast-growing regions, like Brazil and China, where it could develop a market-leading position.

On the other hand, Grupo Pão de Açúcar has gone through some acquisitions recently and its owner, Abilio Dinis, doesn’t hide from anyone his ambition to expand his business even more. Part of the motivation that led Grupo Pão de Açúcar to start this negotiation is the growing desire of Brazilian companies to go global. However, it’s hard to build brands in areas where the market is already saturated or where big brands already control the market. That’s why some Brazilian groups are trying to buy big shares of global companies and merge its business in order to conquer some of the biggest iconic brands in the world, as for instance, Burger King, Anhesuer/Busch Inbev and others. The second reason that might have led Grupo Pão de Açúcar to approach Carrefour is the fact that in 2013 Abilio Diniz will lose the control of operations to Groupe Casino, this is due to the contractual agreement between the two parties. With this merger, Casino’s share would be even smaller and they wouldn’t have power enough to claim for that anymore. Both parties have different goals in this negotiation, but at the same time both would end up gaining as there are multiple interests being discussed. So that, we can say this would be a win-win negotiations, cause it would create value for both parties.

The Proposal To finance the deal, Grupo Pão de Açúcar had to team up with BTG Pactual Bank, creating the investment firm Gama. Gama had commitments for 2.5 billion euros in new capital and debt from BTG Pactual Bank, and the Brazilian National Development Bank. This joint venture would create the largest retail company in Brazil, with total combined sales estimated at 30 billion euros in 2012. According to Gama, the new company would have 2,386 stores in Brazil, and it estimated annual cost savings of 700 million euros from the deal. Gama and Carrefour would split the ownership of the joint venture 50-50, and the investment firm would take an 11.7 percent interest in the French retailer through an issuance of new preferred shares. Gama would also purchase up to 6 percent of Carrefour shares on the open market, making it the company’s largest shareholder. Primarily the main goal of Grupo Pão de Açúcar was to have more influence in the global level. Under the proposed terms, Carrefour would pay roughly market price for Grupo Pão de Açúcar, gaining control of the company and giving Brazilian investors some seats on the new company’s board in the process. Analyzing the Grupo Pão de Açúcar perspective, this deal would represent a huge gain in terms of power, but they actually didn’t analyze the impacts to the operations themselves. Probably this merger would not be good for the market, as it would create a giant retailer owning more than 50% of the market share in Brazil and it would dominate the price fix. As Carrefour is a company controlled by investors, they are more open to accept foreign investments. Since the developed markets are stagnated, they are willing to put their pride aside and be more accepting to have more foreigners as decision makers. This might also be a trend between global companies as they are starting to understand that, as they are global, they need to learn to share their profits and the decisions with managers and investors from around the globe. In this way they would lose the impression of “colonization”, which has a huge resistance in countries around the world, mainly in Latin America and Africa. In this regions of the world, due to historical reasons, companies and governments are more likely to approve and support joint ventures and partnerships that bring jobs and technological gain to local communities, than companies that just want to sell their products in a certain market and take all the profit back to their home countries.

Groupe Casino position After the negotiation became public, Carrefour’s board approved the proposal, but there was a still a big barrier to push through. The French Groupe Casino, which is the owner of a 43.1 percent stake in Grupo Pão de Açúcar, were not included in the initial negotiation and it is the main competitor of Carrefour in France From the beginning, Casino was against the deal and probably Grupo Pão de Açúcar was aware of that and that’s the reason why they didn´t include them in the negotiation in the first place. The French group reacted right away to the announcement of the merger saying the deal “it is not a spontaneous proposal from Gama, a financial investment vehicle, but a long-standing illegal planned financial transaction between Carrefour and Abilio Diniz.” As it is obvious, the relationship between Groupe Casino and Grupo Pão de Açúcar was already difficult. Grupo Pão de Açúcar wanted to expand its businesses and especially they didn’t want to lose the control of operations to Groupe Casino. According to the previous contract with Grupo Pão de Açúcar, Casino would to become Pão de Aucar’s sole controlling shareholder in 2013.
Casino also added it “has the authority to oppose this project according to the existing agreements,” and that it would “examine how to best defend the corporate interests of Grupo Pão de Açúcar and its shareholders” from a transaction that is “illegal and hostile”. The group added that would use "all necessary means to assert its position against the project, in respect of the agreements in force and the Brazilian law" and Casino would even take the president of Grupo Pão de Açúcar, Abilio Diniz, to court for not disclosing talks with Carrefour. In Casino’s point of view, the deal would transform Pão de Açúcar into a “financial holding company of minority investments which is likely to trade at a significant discount.” Even being against the deal since the beginning, Casino analyzed the proposal based on reports made by banks Santander and Goldman Sachs and consultancy advice by Roland Berger. With that in mind, the Casino board of directors analyzed technically the proposal and concluded that there wouldn’t be any gain in merging the operations, as Carrefour is going through managerial problems and has a high cost. For Casino, the merger was senseless for many reasons, as for example the regulation and competition risks.

According to one of the consultants, the merger with Brazilian Carrefour unit misplaces its focus as they have larger supermarkets and is overpriced. Casino also stated that the merger is a gamble on areas of little growth and concentrates excessively on Rio de Janeiro and São Paulo and that 40% of the operations are located in same areas.

Besides that, the strategy to go international was wrong as it would be based in the stagnated European market, instead of focusing on market with high growth.

Abilio Diniz, ahead of Grupo Pão de Açúcar, participated in the meeting where they decided not to proceed with the negotiation, but he didn’t vote, leaving the decision to be made only by the board.

According to the press, after the meeting, Abilio said that there was no possibility for a friendly agreement and said that he did not agree with studies presented at the meeting. "I don't agree with studies carried out here by Roland Berger and others. I believe they don't represent the real situation. But I don't want to criticize anyone”.

Casino’s position was really consistent with its view and it’s interesting that their position was defended with several different arguments. They could have gone straight to court right after the announcement of the merger, but they preferred to go beyond that by doing a technical analysis and reinforcing their position. This kind of approach is good for the shareholders and for the image of the company. They proved to be professionals, reliable and ethical.

As for Carrefour and Grupo Pão de Açúcar, I believe they thought that once the announcement was done, it would be easier to pressure Groupe Casino and they would eventually end up giving up, especially because there was even a Brazilian state-owned development bank (BNDES) involved in the negotiation.

End of negotiations

The first signal the negotiation wouldn’t move forward was that the BNDES bank stated they would just maintain their participation if all the parties found an amicable agreement. As it didn’t happen they withdrew its funds.

It’s relevant to mention the BNDES’s involvement was heavily criticized in Brazil as this investment is contrary to the bank’s primary objective of national development.

After BNDES, BTG Pactual bank also preferred to withdraw the proposal for discussion. Casino claimed that the negotiations should not have happened without their participation, and this act was seen as a hostile move on their part to try to avoid Casino taking control.

On the other hand, Abilio defended himself saying that the limitations of Casino's debt was always making financing mergers difficult. His proposal was to transform the group by breaking it up.

But according to the press, “Casino is opposed to this because stock control in Brazil allows it to consolidate Brazilian operations integrally in its accounting in France, increasing its value”.

Future for Carrefour and Pão de Açúcar Carrefour is certain that it need to have a new partner in order to grow and continue with its operations in Brazil. The costs currently are too high and apparently Carrefour doesn’t have the resources now to invest the amount necessary to upgrade the business. According to the press, now they are considering a merger with U.S. retail giant Walmart instead. Walmart reported an annual global revenue of US$421 billion with operations in fifteen countries worldwide, and has been in Brazil for fifteen years. Grupo Pão de Açúcar doesn’t have much to do now, the merger with Carrefour was its biggest bet to keep in control of its supermarket arm. Casino, on the other hand, will take control of the Pão de Açúcar operations and it will probably boost its value and importance. However, according to the press, they don’t have resources available enough to make all the investments needed to expand the business to its full potential.
Final commentaries This negotiation, even not being concluded, it’s interesting as it brings several different interests, styles of negotiation and limitations at the same time, even with all the efforts from the two most important parties. When it comes to the preparation for the negotiation, Pão de Açúcar and Carrefour were naïve enough to believe that the previous contract could be cancelled as the rules of the game would have been changed and Casino wouldn’t be a major player in the new joint venture. All the parties had different interests in the negotiation, so it was interesting to see that as different needs were negotiated, both Carrefour and Pão de Açúcar could find a common ground to have a win-win negotiation, but unfortunately for them, the deal couldn’t be concluded. At the end, legal and ethical aspects were stronger and respected by all the parties, for the benefit of Groupe Casino.

Carrefour Approached for Brazil Merger (2011).
CBD in play as Carrefour mulls merger (2012).
Pão de Açúcar’s Diniz to discuss retail merger with Casino’s board today (2012).
Walmart Considered in Brazil for Carrefour merger (2012).
Carrefour Brazil merger plan sets up Casino power struggle (2012).
Pão de Açúcar and Carrefour merger sinks (2012).
Abilio’s proposal is an expropriation says Casino (2012).
Abilio Diniz Diniz denied that he sought Jean Charles Naouri. (2012).

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