Axo Buys C&A

Grupo Axo’s acquisition of C&A’s franchise in Mexico will boost the fashion retailer’s revenues by more than 20 percent if approved this year, analysts said.

Axo, a franchiser of top foreign brands such as CK Calvin Klein and Tommy Hilfiger, is engaged in a major buying spree with its second acquisition announcement in two weeks.

The Mexico City-based company this month also agreed to take over Nike’s business in Argentina, Chile and Uruguay. The transaction for an undisclosed sum is pending regulatory approval but is expected to have a smaller impact on its business than the C&A deal.

Axo said it would buy the struggling European retailer’s business in Mexico, where it operates up to 80 department stores with 3 billion pesos, or $157 million at current exchange, in estimated revenues.

Privately held Axo is expected to close 2019 with 13 billion pesos in revenues. If the C&A deal is cleared, that would boost Axo’s turnover to roughly 16 billion pesos and nearly 5,800 doors spread between department-store corners, boutiques and e-tailers.

Axo did not return requests seeking further comment on the C&A and Nike transactions.

Some analysts said the C&A takeover, the cost of which they estimated at more than $100 million, would make a good fit for the group, which has built a successful business by bringing the likes of Victoria’s Secret, Abercrombie & Fitch or Kate Spade to Mexico’s aspirational masses.

“C&A is a big business that will provide access to a broader customer range and private labels to increase profits,” said Maria Pia Medrano, who looks at Axo’s debt ratings for Fitch in Mexico. “C&A has three times the traffic than Promoda [an off-pricer Axo acquired in 2015 and its last major bricks-and-mortar purchase]. They also have experience with credit cards as they run a store card through a joint venture with Bradesco [a Brazilian bank].”

Axo is expected to keep the C&A brand operating in Mexico though it will work to improve its fortunes as the retailer — like others hit by a sluggish economy — has struggled to meet targets.

“They will keep the commercial team and key executive positions, as well as the brand’s DNA,” Medrano added.

With 1 billion pesos in cash and 6 billion pesos in debt forecast by year-end, Axo has the financial muscle and is deleveraged enough to make new buys.

“It has dry powder and its gun is ready,” said an M&A banker in Mexico City, adding that he expects the company to make more purchases in the $50 million-plus range in the near-term. But he noted that the C&A transaction seemed odd and more like a “desperate deal” than one with a good strategic fit.

“The market is wondering about the logic for this C&A acquisition,” he said. “Axo is a company that represents brands [meaning it’s mainly a franchiser] but maybe they paid a good price for it.”

That price was likely below the over eight times 2018 EBITDA that Axo paid to acquire Mexican online retailer Privalia for roughly 1 billion pesos last year, analysts said.

“That made total sense,” added Medrano. “Privalia is doing very well in Mexico and was developing a good omnichannel strategy that would help Axo sell more of its brands online.”

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