MEXICO CITY — Liverpool expects revenues will increase 14 percent to roughly 114 billion pesos, or $6.2 billion at current exchange, next year, helped by its acquisition of Wal-Mart Stores’ ailing clothing chain Suburbia.
“We hope the deal will close in late spring ,” said the Mexican department-store chain’s investor relations director Enrique Grinan, adding that the acquisition of the 119-strong network will help the company achieve its goal of bolstering its presence in Mexico’s growing middle-lower consumer segment.
Liverpool acquired Suburbia for 19 billion pesos, or $1.04 billion. The retailer also expects the acquisition will boost earnings before interest, taxes, depreciation and amortization 12 percent in 2017.
Grinan would not venture an estimate, but EBITDA rose 12 percent to 14.9 billion pesos, or $816 million, last year.
With Suburbia in its net, Liverpool will operate 233 stores and become the country’s second-largest clothing retailer after Spain’s Inditex, which has taken the market by storm in the past decade, according to José Eduardo Coello, an analyst with Ve por Más brokerage in Mexico City.
Liverpool sold 50 billion pesos, or $2.7 billion, worth of clothing last year, he estimated, with the segment accounting for roughly 58 percent of total sales in its 114-strong department-store network.
Roughly 40 percent of Suburbia’s stores are in the Mexico City’s megalopolis including Mexico State, home to large swaths of lower- and middle-class shoppers which Liverpool is keen to target, Coello added.
“This [Suburbia] is a powerful brand and will give us great purchasing synergies and negotiating power with suppliers,” Grinan said. “We will also learn from Suburbia’s private-label business, which has very solid design and procurement [operations] from Asia and incorporate it to our model.”
Weekend, Contempo, Non Stop, La Mode and Metropolis are some of Suburbia’s leading private labels. Liverpool will now incorporate them into its 12-brand portfolio led by trademarks such as JBE, J.B. Ebrard, Haus, Petite Elite, That’s It and Wind among others.
Suburbia’s purchase comes as Liverpool is expanding in South America. The firm last month reached a deal to purchase at least 25.5 percent of Chilean rival Ripley for a reported $350 million to $400 million. The transaction values the 70-strong chain with a presence in Chile and Peru at $1.3 billion. It faces shareholder resistance and must gain regulatory approval.
Grinan said Liverpool will run Suburbia separately from its Fabricas de Francia banner, which also targets budget-conscious shoppers in Mexico but which has been struggling for years. He rejected views that Liverpool could transform 10 to 15 Suburbia stores into Fabricas de Francia.
“We are going to keep the three brands [Liverpool, Fabricas de Francia and Suburbia] separate but Suburbia will strengthen our presence in the middle-to-lower class segment,” Grinan said.
The bulked-up Liverpool will strengthen Suburbia’s footwear, jewelry and beauty presence and will broaden its merchandise assortment.
Liverpool hopes to raise the chain’s same-store revenues by at least 6 percent annually, in line with the group’s annual base targets, Grinan said. For the fiscal year ended in March, Suburbia posted $739 million in sales.
Mexico City-based Liverpool clinched Suburbia at a bargain, analysts said, paying significantly less than the $1.1 billion to $1.7 billion initial valuation estimate when Wal-Mart’s Mexican and Central division, Walmex, put it on the block early this year, triggering a flurry of bidder interest.
Archrival Coppel was tipped as a strong suitor but later pulled out of the race amid reports that Wal-Mart’s price was too high. Chile’s Falabella and U.S. private equity fund Advent were also said to be in the bidding for Liverpool as the deal neared its end.
Walmex said Liverpool would pay 15.7 billion pesos for Suburbia including debt but in a regulatory statement, Liverpool said the transaction also includes 3.3 billion pesos in future dividend payments to its shareholders, boosting the total to 19 billion pesos.
Walmex said the transaction will enable it to focus on its more profitable hypermarket business.
Carlos Hermosillo, analyst at Mexican broker Actinver, said Liverpool will inject supply chain and other efficiencies into Suburbia for which it will likely ramp up credit to boost sales.
“Walmex was expected to expand credit for Suburbia customers but we have not seen that,” said Hermosillo.
Liverpool, which has 3.6 million customers through its Liverpool and Liverpool Visa store and credit cards respectively, will likely allow customers to user their card to pay for Suburbia purchases and expand Suburbia’s credit products.