ECH to benefit long term from Cencosud’s acquisition of Carrefour
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Cencosud, a large South American retailer based in Chile currently accounts for 6% of the MSCI Chile Investable Market Index, making it the 5th largest holding in ECH, the ETF tracking the index.
The Company announced that it acquired the Colombian assets of Carrefour, the French supermarket operator, for $2.6bn. The acquisition, while positive in the long term, was not well received by the investors given the apparently high valuation paid and the lack of synergies in the deal given Cencosud’s limited presence in the Colombian market. On further review, it was pointed out that the multiple was adequate when the real estate acquired was taken into consideration. Comparable previous retail asset sales in Latam generally did not include the actual real estate, just the operations.
The Company further announced that it was going to raise c. $1.5bn of equity in the near term to help fund the acquisition. This secondary equity offering will dilute the ownership of existing shareholders. Graphing the performance of ECH vs. Cencosud (CHL:CENCOSUD) reveals the high correlation of both stocks. Furthermore, the graph shows a dip on October 22 when the transaction was announced.
When investing in emerging markets ETFs, it is important to know who the largest constituents are and track their performance to understand how they may affect the overall ETF and to decide how to best position the portfolio. In the short term, it is likely that Cencosud may experience some downward pressure stemming from the upcoming capital raise and while the uncertainty of the projected combined company performs settles, though much of the decline may be priced in already. In the long term though, if integration goes well and margins expand as planned, Cencosud should appreciate and boost ECH’s performance.