Lenta completes acquisition of Kesko food retail business in Russia from Kesko

St. Petersburg, Russia; 30 November, 2016 – Lenta, (LSE, MOEX: LNTA) one of the largest retail chains in Russia, is pleased to announce the completion of the purchase of the the Kesko food retail business in Russia (“KFR”), currently operating under the K-Ruoka brand, on November 30, 2016.

Assets acquired
The KFR assets consist of 10 hypermarkets and one supermarket operating under the K-Ruoka brand in St. Petersburg and the Leningradskiy region as well as three land plots in Moscow and the Leningradskiy regions. Most of the hypermarkets were opened in 2012-2015 and two stores were opened during 2016. Total selling space of the acquired stores is approximately 42,500 sq.m, of which approximately 40,200 sq.m are owned and approximately 2,300 sq.m are rented. The stores are compatible in terms of size and layout with existing Lenta compact and supercompact hypermarket formats, and almost all of the store locations are highly complementary to Lenta’s existing stores in Saint-Petersburg and the Leningradskiy region. The high proportion of owned stores is in line with Lenta’s store ownership strategy. The KFR business and assets are owned by six legal entities which have been purchased as part of the transaction.

Lenta’s Chief Executive Officer, Jan Dunning said:

“We are very pleased to have completed the acquisition of the Kesko retail business in Russia. The acquisition will significantly strengthen our network in St. Petersburg, giving many more customers the opportunity to shop at a Lenta store close to their homes. Lenta will become the largest hypermarket operator in the city, but we still see good opportunities for further growth in and around St. Petersburg, so will continue our organic expansion in both hypermarket and supermarket formats.

The stores have excellent urban locations and well-trained store teams who we welcome to the Lenta family. We will soon operate the stores under the Lenta brand, with Lenta assortment, supply chain and business processes. We expect the integration process to be largely complete by year-end.

With this acquisition, we now expect to open at least 50 new hypermarkets in 2016. While Lenta remains primarily focused on its successful organic expansion, we welcome opportunities to augment this by acquiring high quality assets such as the Kesko stores. Scale is becoming increasingly important in the Russian market which is likely to lead to consolidation of both larger and smaller players over time. Lenta is well positioned to selectively take advantage of any opportunities that may arise in the future.”

Strategicrationale

• The acquired stores have a very good fit with Lenta given their high quality, complementary locations; store sizes and designs compatible with the Company’s existing formats; high quality of construction; and well trained and motivated staff. The combination of these factors with Lenta’s well-known brand and attractive consumer proposition is expected to enable rapid and successful integration;
• The acquisition strengthens Lenta’s market position in St. Petersburg, Russia’s 2nd largest city. Lenta operates 22 hypermarkets and nine supermarkets in the Saint-Petersburg/Leningradskiy region with total selling space of 144k sq.m – approximately 15% of the Company’s total selling space in Russia as of 30 November 2016. The addition of the KFR stores will take Lenta’s total presence in the St. Petersburg/Leningradskiy region to 32 hypermarkets and 10 supermarkets with around 186k sq.m of selling space. The company envisions significant further expansion in the Saint-Petersburg/Leningradskiy region;
• Given the quality of KFR stores and locations, the acquisition is expected to deliver attractive returns, broadly in line with returns on organic expansion.

Approvalsand financing
Approval of the Federal Antimonopoly Service of the Russian Federation (“FAS Russia”) was received during November. The transaction has closed and no further approvals are required. Some administrative actions such as registration of assets and leases and renewal of certain licenses are required and it is expected that these will be largely completed before year end 2016. The transaction was financed using Lenta’s existing cash and a new long-term loan facility with a fixed interest rate below current Central Bank key rate which will lead to further reduction of the Company’s average effective cost of debt.

JP Morgan and VTB Capital acted as advisors to Lenta on this transaction.

Purchaseprice
The aggregate transaction consideration is Rub 11.4bn, an increase of Rub 0.4bn due to closing adjustments when compared to the aggregate base transaction consideration of Rub 11.0bn given in our earlier announcement. The difference is due to a higher than initially planned amount of cash and cash-like items on the balance sheet at closing. Lenta estimates that the replacement value of the acquired real estate and other fixed assets, positive working capital and other non-fixed assets is approximately equal to the purchase price.

Integration
Integration of KFR with Lenta will begin immediately. Each store will be closed for approximately one week from December 1st, then reopened as a Lenta store. The stores will operate in the same way as other Lenta stores in St. Petersburg under the Lenta brand, with Lenta assortment, supply chain, IT and business processes. Former KFR employees are now Lenta employees. Every effort will be made to minimize disruption for customers and employees during this integration period. Lenta considers the well-trained store staff to be one of the strengths of the business and welcomes them to the Lenta team. No redundancies among store staff are expected. KFR headquarters functions are being integrated into Lenta headquarters. Operationally, the integration is expected to be largely complete by year-end 2016.

Guidance related to the acquisition

• Sales – the effect of the acquisition on Lenta 2016 sales will not be material (approximately 0.2% of total sales in 2016), given the short period between closing and year end 2016, and closure of the stores during part of this period in December for rebranding and other integration activities. The acquisition is expected to add around 3-4p.p. to Lenta sales growth in 2017 after taking into account minor cannibalization effects. The stores are expected to deliver sales densities at or above Lenta’s average by 2018;
• EBITDA and Net Income margins - in 2016 EBITDA margin will be negatively impacted by around 0.1p.p. and Net income margin will be impacted by approximately 0.2p.p due to one-off integration/M&A related costs. In 2017 the overall effect on Lenta EBITDA margin and Net income margin is not expected to be material. The stores are expected to deliver margins at or above Lenta’s average by 2018;
• Capex – the KFR stores are built to high standards and relatively new, so capex costs to rebrand the stores and adapt to Lenta requirements are not expected to be material. In the short term, Lenta will optimize capacity at the existing owned and rented distribution centres in St. Petersburg without significant additional supply chain related capex. In the medium term, some additional supply chain capacity is likely to be added in St. Petersburg to support continued growth in both hypermarkets and supermarkets – options on how best to achieve this are being evaluated. The Company’s new 2016 capex guidance is Rub 55-60bn, including the investment in the acquisition of the KFR stores;
• Acquisition of KFR will not affect Lenta’s credit rating and was considered as credit positive by Moody’s and Fitch Rating Agencies.

Guidance related to Lenta new store openings

• New hypermarket opening guidance – the acquisition will be additional to Lenta’s prior guidance of at least 40 new hypermarkets in 2016. Lenta therefore plans to open at least 50 hypermarkets in 2016, inclusive of the acquired KFR stores. If the number of store openings in 2016 significantly exceeds this new guidance, the Company may adjust the pipeline for 2017 while still delivering a total of at least 90 hypermarket openings in 2016-2017;
• New supermarket opening guidance - the acquisition does not affect prior supermarket opening guidance.

About Lenta

Lenta is the largest hypermarket chain in Russia (in terms of selling space) and the country’s fifth largest retail chain (in terms of 2015 sales). The Company was founded in 1993 in St. Petersburg. Lenta operates 169 hypermarkets in 76 cities across Russia and 43 supermarkets in Moscow and St. Petersburg, with a total of approximately 1,043,894 sq.m of selling space. The average Lenta hypermarket store has selling space of approximately 5,900 sq.m. The average Lenta supermarket store has selling space of approximately 1,000 sq.m. The Company operates six owned hypermarket distribution centres.

The Company’s price-led hypermarket formats are differentiated in terms of their promotion and pricing strategies as well as their local product assortment. The Company employed approximately 34,134 people as of 30 June 2016¹.

The Company’s management team combines a mix of local knowledge and international expertise coupled with extensive operational experience in Russia. Lenta’s largest shareholders include TPG Capital and the European Bank for Reconstruction and Development, both of which are committed to maintaining high standards of corporate governance. Lenta is listed on the London Stock Exchange and on the Moscow Exchange and trades under the ticker: ‘LNTA’.

A brief video summary on Lenta’s business and its Big Data initiative can be seen here.

For further information please visit www.lentainvestor.com, or contact:

Lenta
Anna Meleshina, 
Public Relations & Government Affairs Director
Tel: +7 812 363 28 53 
E-mail: anna.meleshina@lenta.com

Anastasia Kuznetsova, 
Corporate Communications Manager
Òel:+7 (812) 336 39 97 
E-mail: a.kuznetsova@lenta.com

Citigate 
International Media: 
David Westover and Marina Zakharova
Òel: +44 207 282 2886
E-mail: lentateam@citigatedr.co.uk

FTI Consulting 
Russian Media:
Anton Karpov & Victoria Afonina
Òel:+7 495 795 06 23
E-mail: lenta@FTIconsulting.com
1 FTE (full-time equivalent). Average FTE for 1H 2016 was 33,758 employees