UPDATE 5-Brazil Pao de Acucar buys rival, eyes retail boom

By Guillermo Parra-Bernal and Elzio Barreto

SAO PAULO, Dec 4 (Reuters) - Brazilian retail group Pao de Acucar reached an agreement on Friday to acquire a controlling stake in rival Casas Bahia in a noncash deal, gaining a commanding grip over the South American country's booming home appliances market.

The deal will also consolidate Pao de Acucar's lead over big multinationals such as French retailer Carrefour and U.S.-based Wal-Mart Stores Inc, which have been investing heavily in Brazil in recent years to take advantage of a surge in economic growth.

The transaction, which involves a complex asset swap valued at about 4 billion reais ($2.3 billion), will create a retail giant with 1,807 stores and 40 billion reais ($23.4 billion) in annual sales -- more than twice the amount its closest rival Carrefour rang up in 2008.

'It's going to be a lot tougher for anyone to pick a fight with a company of this size,' said Januario Hostin Jr, an analyst at Leme Investimentos in Florianopolis.

Pao de Acucar, which was founded in 1948 in Sao Paulo as a corner store, expects the deal to help it cut costs and expand nationwide in Brazil. The company expects 2 billion reais ($1.17 billion) in cost savings from administrative and technology costs.

'It was an opportunity to seek synergies and efficiency,' Abilio Diniz, the Pao de Acucar chairman who co-owns the retail company with France's Casino, said at a news conference. 'I think this synergy estimate is low. We have identified a series of opportunities.'

Casas Bahia will spin off its operational assets into a new company called Nova Casa Bahia in an asset swap that also includes 950 million reais of debt, said Percio de Souza, head of Estater, the financial adviser to Pao de Acucar.

Nova Casa Bahia will then be taken over by Pao de Acucar's appliances unit Globex Utilidades. Pao de Acucar will eventually gain a 51 percent stake in Globex, with Casas Bahia's founding family holding the remainder.

The transaction, which must be approved by regulatory authorities, should be completed in 120 days, Pao de Acucar said in a securities filing. But Arthur Badin, the president of Brazil's antitrust watchdog Cade, said the regulator is unlikely to rule on the deal before mid-2010.

Pao de Acucar shares were up 7.8 percent after surging as much as 11.9 percent early in the session, while Globex traded 22 percent higher after soaring as much as 27.5 percent.



SURGING DEMAND FOR HOME APPLIANCES

Diniz, whose flashy personal life is often chronicled in the society pages of Brazilian newspapers, said Pao de Acucar received an inquiry from Brazil's securities regulator on Thursday because of an 'unusual jump' in Globex stock, which soared 34.5 percent in the previous session.

That prompted the companies to announce the deal sooner than expected, he said.

As part of the deal, Casas Bahia's founding family, the Kleins, will own all of the combined company's real estate and rent the space back to the new firm. The tie-up will also give Casas Bahia a more stable source of funding for growth and force it to boost transparency, said Souza, the adviser.

In an interview on Dec. 2 with Reuters, Pao de Acucar Chief Financial Officer Eneas Pestana said the upward trend of sales in the consumer electronics segment after the takeover of Globex in June justified looking for acquisition opportunities in the sector.

The Brazilian market for home appliances has gained momentum in recent months after the government, seeking to propel a two-year, $20 billion housing plan for low-income families, cut taxes on stoves, refrigerators and washing machines and urged banks to extend credit.

Pao de Acucar is seeking to grow rapidly in the home appliances industry to take advantage of a consumer sector that is expanding at a faster pace than the economy as a whole.

'Brazil's economy is expanding at full throttle, with accelerated growth now at the end of the year,' Pao de Acucar's Chief Executive Claudio Galeazzi said. 'We took advantage to become much more aggressive in our market stance.'

Pao de Acucar, which is best known for its supermarket chain of the same name, agreed in June to pay about $430 million for 70 percent of Globex, the owner of the Ponto Frio chain of home appliance stores.

Casas Bahia was founded on the outskirts of Sao Paulo in 1958 by Holocaust survivor Samuel Klein, who is often referred to as Brazil's version of Sam Walton, the Wal-Mart creator. Klein built a retail empire by courting the poor with payment plans with monthly installments, essentially extending credit where banks would not.

($1=1.71 reais)

(Additional reporting by Alberto Alerigi Jr. and Vanessa Stelzer; Writing by Todd Benson; Editing by Phil Berlowitz) Keywords: PAODEACUCAR CASASBAHIA/ ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.