"Magnet" plans to enter the business of drug trade

The retailer will buy a distributor of SIA Group from its shareholder, Marathon Group, the son-in-law of Russian Foreign Minister Sergey Lavrov. The market reacted to this by the fall of the shares of Magnit.
Wishing to develop its pharmacy retail, Magnit entered into negotiations on the purchase of the sixth largest pharmaceutical distributor in Russia, "SIA Group". He owns the Marathon Group, which recently acquired 11.81% stake in the retailer. The deal, which could cost Magnit up to $ 100 million, disappointed its investors: they consider it inappropriate to invest in a marginally profitable drug business.

Russia's second-largest food retailer, Magnit, said on Wednesday that it is in talks with the Marathon Group to purchase a distributor of drugs from the Group of Companies (SIAA International Ltd.). The transaction parameters will be determined following the results of negotiations and a comprehensive legal and financial analysis of the asset, the retailer said. The representative of Marathon Group specified that the sale of 100% of SIA is being discussed. The executive director of "Magnit" Olga Naumova noted that the deal is planned to be completed by the end of the year.

Part of the Marathon Group of Alexander Vinokurov and Sergei Zakharov (former top managers of A1), SIA became in 2017. According to RNC Pharma, "SIA Group" is the sixth largest distributor of drugs in Russia with a share of 3.8%. The company's revenue for the past year amounted to 54.5 billion rubles. A source familiar with her business, says that the debt of SIA is 10 billion rubles. Senior analyst of BCS Global Markets Marat Ibrahimov estimates that the AIS based on the multiplier of 5-6 EBITDA (about 1 billion rubles): thus the amount of the future transaction can be 5-6 billion rubles. ($ 81-97 million).

Since August 2017 the Marathon Group has an agreement with Rostekh to combine pharmacies. In the joint venture on the basis of "Natsimbio" (the developer and supplier of the "Rostecha" vaccines), 49% of "SIA Group" and shares in several pharmaceutical plants were to enter from Marathon. In February, the partners reported that Marathon will receive 25% plus one share in Nacimbo for its assets. Yesterday, the companies said that the SIA would not enter the perimeter of the deal: the parties came to the conclusion that its capacities are redundant to meet the needs of "Natsimbio" in logistics. As the exit from the deal with "Rosteham" will affect its parameters, the Marathon Group has not yet been told.

An updated strategy for the development of the pharmaceutical market, involving the development of logistics through the acquisition of a distributor, was approved by the board of directors of Magnit on May 17, a week before the announcement of the transaction to buy Marathon from VTB 11.81% stake in the retailer (at the time of the transaction, the value of this package was 62, 5 billion rubles.). "" SIA Group "most closely matches our requests," explained the general director of "Magnit" Khachatur Pombukhchan.

In Magnit, the intention to purchase a distributor of medicines was explained by plans for expansion into the pharmacy retail market.
The company now opened 51 pharmacies: according to Ms. Naumova, they show a good dynamics of traffic and average check, as well as a good profitability. As noted in the "Magnet", pharmacies can be integrated into a significant part of their cosmetics stores (3.89 thousand), stores near the house (12.28 thousand) and hypermarkets (242).

Investors negatively reacted to the news about the upcoming deal of Magnit. On Wednesday, at the auctions in London, the retailer's securities fell by 7.91% (capitalization - $ 9.67 billion), on the Moscow Stock Exchange - by 4.6% (RUB 503.14 billion). "U Magnit has a lot of problems with the main operating business, with its management. Instead of focusing on them, they are distracted by the discussion of buying a pharmaceutical distributor, although their pharmacies can buy drugs directly from manufacturers or from the same wholesalers that are on the market, "- indignant Alexei Krivoshapko, Director of Prosperity Capital Management (" Magnit "minority shareholder). He draws attention to the fact that the wholesale business of selling medicines is not profitable: the EBITDA margin for distributors is only 1-2%.

According to Mr. Krivoshapko, transactions of companies with their own shareholders are always a "red flag for investors". He suggests that the sale of SIA could be discussed in advance between Magnit and Marathon: "The deal will allow the latter to refinance the purchase of a stake in the retailer."