French retailer Carrefour is seeking to buy Sedmoi Kontinent in a deal that would make it the first foreign company to enter the Russian retail market since the credit crunch hit local firms.
Two banking sources close to talks said Tuesday that the world's No. 2 retailer had sent letters to the main owner of Sedmoi Kontinent, Alexander Zanadvorov, and his lender, Deutsche Bank, offering to buy control of Russia's oldest retailer.
Sedmoi Kontinent's stock closed up 22.4 percent at 236.75 points on Tuesday on the MICEX stock exchange.
"Carrefour is talking to Deutsche Bank about buying the entire stake of Zanadvorov, which the bank has as collateral against a loan," said a banking source working with Carrefour.
A source close to Deutsche Bank also confirmed that Carrefour had offered to buy Zanadvorov's 74.8 percent stake and help him redeem $560 million in debts to Deutsche Bank. The offer is nonbinding, and it will take Carrefour up to a month to complete due diligence and to come up with a firm proposal.
Zanadvorov was not available for comment. Sedmoi Kontinent spokeswoman Vlada Baranova said the company was unaware of such talks. Carrefour declined to comment. Russian retailers have borrowed aggressively in previous years to speed up expansion amid Russia's consumer boom.
The strategy backfired, however, when credit markets collapsed and, like many other Russian businessmen, Zanadvorov struggled to refinance its loan to Deutsche Bank. He received a margin call from Deutsche Bank in November after the market value of Sedmoi Kontinent sank with other Russian equities. The bank has agreed to restructure the loan and has been helping Zanadvorov find a buyer for his business.
A source close to Zanadvorov has said interested parties included private equity firms Apax Partners and Baring Vostok Capital Partners, U.S.-based TPG and others. Zanadvorov rejected a bid from TPG last year.
Russian retailers face a difficult year as the country enters a recession while rising unemployment and slower income growth will hit most consumers.
But the downturn may also offer global majors an easier entry into a sector that has more potential than many mature markets and where prices for distressed assets are set to drop dramatically.
Carrefour plans to open its first Russian store this year and has pledged to spend $100 million to expand in the country. The retailer aims to catch up with the likes of Metro and get a jump on Wal-Mart stores, which is looking at expansion in Russia.
Industry sources have said Wal-Mart has hired 30 Russian office staff and is in acquisition talks with local chains that may need a cash injection to cope with the financial crisis.