JP Morgan paving the way for Cencosud deal

Oct 26 (IFR) - JP Morgan is holding the trump cards to lead a multi-billion dollar financing package for Chilean retailer Cencosud after it put down US$2.5bn to help the company finance the acquisition of the Colombian unit of Carrefour.

Not surprisingly, the US bank has been mandated on the equity follow-on - and other banks are now vying for ancillary business as JP Morgan approaches institutions to participate in the syndication of the 18-month bridge to bond and equity take-out.

The bond offering will be presented to the board of directors in the next 90 days, with a size of about US$1bn, while the roughly US$1.5bn capital raising will be put before the board in the next 120 days. Both will be used to assist in the improvement of the company's capital structure and debt repayment schedule.

Both Moody's and Fitch placed their Baa3 and BBB- ratings on negative watch as leverage increases in the wake of the acquisition. The bridge take-outs, particularly the equity offering, will be key in appeasing the rating agencies.

"The company is expected to raise equity to fund a portion of the acquisition. The equity raised will have to be substantial to avoid a downgrade," Fitch noted on October 12.

Cencosud's pro forma total adjusted debt-to-Ebitdar ratio will increase to around 5.5 times following the acquisition versus a consolidated total adjusted debt-to-Ebitdar of 4.8 times at the end of June, Fitch estimated.

"This company is a mega-conglomerate across not only Chile, but Brazil, Argentina, Peru and now deeper into Colombia," said an ECM banker.

"I can't imagine its ratings or stock will suffer because of this acquisition. It's strategic - and straight out of a corporate finance textbook in how it's financing its growth strategy."

Cencosud came to the market on June 21 with a follow-on offering of US$546.4m, its ADR (American depositary receipt) debut and part of a US$1.3bn global capital increase.

Credit Suisse, JP Morgan, Morgan Stanley and UBS were joint bookrunners on the trade, along with BBVA and Santander. The retailer went public with a US$327m IPO in March 2004. Its shares fell 6.2% the day after the acquisition announcement.

Cencosud's operations include 726 supermarkets, 81 home improvement stores, 74 department stores and 25 shopping centers. Meanwhile, Carrefour has more than 100 stores, including supermarkets and convenience stores, in Colombia.

"This is a play on the growing middle class in the country," said an equity trader in Bogota.

More M&A activity is expected next year, not only in retail, but in financial institutions as well, according to ECM bankers. Chilean bank Corpbanca made public its acquisition of Colombia's Helm Bank for US$1.28bn in early October.

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