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Battle for majority control of Brazil’s retail industry falls through

Retail tycoon Abilio Diniz couldn’t get Casino and Carrefour to agree

Brazilian retail tycoon Abilio Diniz has suspended plans to merge his supermarket chain Grupo Pao de Acucar with the local arm of France's Carrefour. The move comes after the Brazilian state development bank BNDES and a private fund backed out of supporting the deal.

Carrefour's French rival Casino, which owns a major stake in Grupo Pao de Acucar, had also opposed the deal.

Gama, the investment fund unit of Banco BTG Pactual said the rejection by Casino, which owns more than 40% of Sao Paulo, Brazil-based Pao de Acucar, prompted the fund to “temporarily suspend the proposal,” according to an e- mailed statement.

BNDES also withdrew from a plan to help fund the deal, saying in an e-mail that agreement between all parties was a condition for its participation.

The proposed merger “grossly” overestimates potential cost savings, has high execution risks and would reduce Pao de Acucar's earnings per share, Saint Etienne, France-based Casino said in a statement released after a board meeting Wesnesday.

“Reason prevailed,” Carlos Lessa, former BNDES president in 2003-2004, said in a telephone interview from Rio de Janeiro. “It doesn't seem smart to me to create a company with a French partner that's having thousands of problems in the various markets in which it acts.”

Pao de Acucar Chairman Abilio Diniz and Casino are battling over the Brazilian retailer, which they control together through Wilkes, a joint venture. Casino, which has filed two requests for arbitration at the International Chamber of Commerce, said Wednesday that Chairman Jean-Charles Naouri will defend the French company's position “by all appropriate measures.”

Meantime Carrefour, the world's No.2 retailer, warned on profits for the fourth time in a year after a plan for the potentially lucrative merger in Brazil was off. Shares in the French group dropped to a two-year low after it said in a second-quarter sales update that it expected operating profit in the first six months to fall 23% and acknowledged it made a mistake in raising prices earlier this year, before some rivals.

The latest disappointment will heap fresh pressure on Chief Executive Lars Olofsson whose ambitious transformation plan, launched in June 2009, is making little headway.

The shares have fallen 44% since September last year, but the Swede appears to retain the support of key investor Blue Capital -- an alliance of luxury tycoon Bernard Arnault and U.S. group Colony Capital -- as only last month Carrefour said it would make him chairman in addition to his CEO role.

The firm pledged to focus on keeping prices down, while reining in spending on promotions and loyalty schemes.

Carrefour, Casino and industry leader Wal-Mart are jostling for position in the fast-growing Brazilian market to offset sluggish growth in their home territories.

Carrefour, with more than 9,500 stores in 32 countries, is two years into an ambitious turnaround programme aimed at slashing costs, boosting competitiveness and revamping its core hypermarket business.

The group said first-half operating profit would be about 760 million Euros, with a 35% drop in France and a small decline in other core European markets offsetting a significant increase in Latin America and Asia. Second-quarter sales rose 1.6% to 22.4 billion Euros, broadly in line with expectations.