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Reliance Retail Ventures Ltd., a subsidiary of Reliance Industries Ltd., announced signing of a definitive agreement to acquire 100% equity stake in Metro Cash & Carry India Pvt. Ltd. for a cash consideration of Rs 28.5 billion.
This implies a valuation of 0.4 times enterprise value/sales and 22 times EV/Ebitda on an FY22 basis, which is at a significantly better valuation compared to previous acquisitions in the grocery space at ~1 time EV/sales.
Metro has a revenue/Ebitda of Rs 70 billion/Rs 1.3 billion with a net loss of Rs 0.5 billion. This is expected to add ~15% to the current busines-to-business and grocery segment for RIL (estimated to be about Rs 450 billion in FY22).
Although the company has been present in India since 2003, it has not been able to significantly increase its footprint over the last five to seven years. Over FY19-22, it has grown revenue merely at 2%, garnering about 11% gross margin and 2% Ebitda margin (FY20-22) with a net loss of Rs 200-500 million. Further, it has added only six stores in the last four years over FY18-22.
While the format has remained closer to break-even levels, with a loss of Rs 0.5 billion in FY22, RIL can turn the segment profitable through improved scale and synergies/efficiencies across supply chain networks, technology platforms, and sourcing capabilities.
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