The Deal That Never Happened

Brazil’s Pão de Açúcar gets rebuked by Casino, its local partner, when it approaches troubled Carrefour for a global merger.

BY THIERRY OGIER
Latin Trade Magazine

SAO PAULO — To Abilio Diniz, the sky is the limit, or so it seemed. Diniz, the son of a Portuguese immigrant who launched a small grocery store in São Paulo after the Second World War, indeed became Latin America’s largest retailer a half century later.

Then, within just six months, his group doubled in size thanks to two key 2009 acquisitions in the non-food market (Ponto Frio and Casas Bahia). But at almost 75, the still-ambitious Diniz, chairman of Pão de Açúcar (listed in São Paulo and New York as Companhia Brasileira de Distribuição, or CBD), was aiming even higher: He wanted to play a role in the global marketplace. In Brazil he had friends in high places who, he thought, could grease the wheels of a mega-merger with Carrefour, the world’s second largest, but troubled, retailing chain.

A detailed plan was unveiled in late June after weeks of speculation. With the support of the Brazilian development bank (BNDES), which would finance most of a 2 billion euro equity swap transaction, and the BTG Pactual investment bank, Brazil’s top retailer intended to merge with Carrefour. The Brazilian government’s initial reaction was positive. The BNDES gave a preliminary go ahead to proceed, although it did not release any funds at that stage.

Still, ministers supported the move. Fernando Pimentel, minister of industry and foreign trade, said the deal had “a strategic importance for Brazil.” He sounded convinced by Diniz’ nationalist argument, and saw a wide opportunity for exporting Brazilian food products. “This would open a very important gate to put Brazilian products in foreign markets. We will have for the first time Brazilian processed products abroad in a large international retailing chain,” he said. Meanwhile, the presidential civil chief of staff, Gleisi Hoffmann, maintained that no public money would be involved since the transaction would be carried out by BNDESpar, the equity arm of the BNDES. Diniz spoke on the main evening news program on Globo television that night and characterized the merger as in everybody’s best interest.

Finally, the grand scheme that he had been mulling for months with his close advisers, Percio de Souza from the Estater financial boutique, and Claudio Galeazzi, a partner at BTG Pactual and a former Pão de Açúcar CEO, was up and running. His Novo Pão de Açúcar would get even bigger in Brazil, where he would have the opportunity to sort out Carrefour’s troubled subsidiary, and he would also get a stake in the Paris-based company.

Indeed, Carrefour was up for grabs. Some of its key shareholders, the Arnault Group and Blue Colony, wanted out in order to recoup some of their losses, and the Brazilian subsidiary itself had been involved in a 550 million euro accounting fraud. It was a golden opportunity. The thinking was, if they did not do it, Walmart would.

It all seemed to be coming together. But that was before Groupe Casino weighed in.
If the Diniz deal went ahead, Groupe Casino, which first acquired a stake in CBD 12 years ago and was due to take over in June 2012 in line with a shareholders’ agreement, would see its share in the business diluted.

What’s more, French hypermarket firm Casino also happened to be Carrefour’s arch rival in France, Casino’s top market, and its boss, Jean Charles Naouri was dead set against the deal from the start. He had already called for arbitration before the International Chamber of Commerce against Diniz’ moves, and started buying CBD’s shares on the stock market to increase its position in the company, going from 33.7 percent to 37 percent in June. (He later continued buying and by December, 2011, owned 48 percent of the company’s equity.)
But to Diniz, it all seemed like a minor inconvenience. The former racing champ is the kind of businessman who does not take a “non” for an answer and he thought he would be able to twist Naouri’s arm. But Naouri, a former cabinet chief to the late French president François Mitterrand, is not one for turning. He accused Diniz of shifting the goalpost with the ball still in play. After Diniz and his financial advisers unveiled their plan in late June, he spoke bluntly of “expropriation.”

In an exchange of emails with Diniz he said there was no point in meeting him after such “dissimulation.” He felt cheated. In the late 1990s he had helped rescue the indebted Diniz business, which suffered greatly from the devaluation of the real.
Later, Naouri flew to Rio de Janeiro to meet with Luciano Coutinho, the president of the BNDES. Calmly, almost methodically, he insisted on the need for Brazil to respect contracts. “He was very careful in signing the [2006 shareholders’] agreement, and there is no way that there could have been a loophole in the contract” that could allow Diniz to engage in a business negotiation without telling his main business partner, says a source who has worked in the past with both men.

Eventually the Brazilian government backed down and the deal collapsed, but Diniz still thinks that he was misunderstood. On several occasions, he tried to raise the issue again with Naouri, to no avail. In spite of this, Diniz has continued to defend the plan in public. “Was it a great plan?” he asked before a managers’ audience during an Endeavor Institute event in São Paulo last November. “It was sensational. Could it still be? Maybe it can. And I believe in it because it is a project with a beginning, a middle and an end.” He insisted that his biggest mistake was to have involved the BNDES, and that BTG Pactual could have mustered enough resources from the financial market to eventually go ahead with the merger. Naouri was not amused. As soon as these comments were made public, Casino sent a letter to Diniz to seek clarification.

At the end of the day, the legendary Diniz may well have gone a step too far. The irony is that after the failed merger between Pão de Açúcar and Carrefour, Diniz and Naouri will still have to work together for some time. Indeed, Casino may be able to run the business by next June, but the contract also says that Diniz may remain as chairman of the board. The cold war is not over yet. In fact, it may just be starting. 

This article originally appeared in the January/February issue of Latin Trade magazine.