The country's largest alcohol seller is going public. What you need to know about the Red & White IPO

The retail chains Krasnoe & Beloe and Bristol are at the final stage of preparation for an IPO. If the Nov. 10 listing goes through at a projected valuation of $12-13 billion, the company will become the second most valuable public grocery retailer in the country behind Fix Price. What the company said in its IPO prospectus and what analysts think about its valuation.

Trading in securities of the Cypriot company Mercury Retail Group (MRG), which owns the Krasnoe & Beloe and Bristol chains, should begin on November 10 on the Moscow Exchange. The company operates more than 14,000 stores under two brands in 68 regions. Krasnoe & Beloe and Bristol operate in the ultra-convenience format — convenience stores with an area of ​​up to 200 sq. m. Almost half of the group's sales come from alcohol.

• The company plans to place up to 200 million receipts at a price of $6-6.5 per share, according to its placement prospectus, published on November 3. Thus, the valuation of the entire company will reach $12-13 billion.
• The current shareholders of MRG will offer the papers. 49% of the company's shares belong to the founder of "Red & White" Sergey Studennikov and his family, 37.25% and 7.69% respectively - to the founders of "Bristol" Igor Kesaev and Sergey Katsiev. It is assumed that as a result of the IPO, Kesaev will reduce his share to 33.52%, Katsiev - to 6.92%, Studennikov - to 40.5%, and a certain member of his family - from 4% to 3.6%.
• The internetwork score could have been higher. At least back in mid-September, one of Bloomberg's sources said that the company was counting on a $20 billion valuation at the IPO.
• The VPost publication, which is made by former Vedomosti journalists, asked analysts about the fairness of the company's valuation at $12–13 billion. at Magnit and 13.3x at X5, Dmitry Puchkarev, an expert at BCS World of Investments, calculated. Such an assessment is justified by higher revenue growth and profitability than competitors, he believes.
• Veles Capital analyst Artem Mikhaylin, taking into account MRG's net debt of $1 billion, estimates the EV/S indicator (company's value to its sales) at 1.3-1.4x, while food retailers in Russia are traded at 0, 5x. The company's EV/EBITDA (value-to-earnings before taxes, depreciation and interest) is also twice as high, around 11.6-12.5x (if year-end margins are in line with H1), and grocery retailers like Magnit and X5 are trading at the level of 5.5x, Mikhaylin VPost calculates. According to his calculations, Mercury's valuation comes closer to the current FixPrice figures (2021 EV/S of about 2x and 2021 EV/EBITDA of about 12x), but below the IPO FixPrice estimate.
• Among the factors of MRG's investment attractiveness, the company's memorandum lists the prospects of the ultra-convenience segment. GfK estimates in the document that the segment has the potential to open more than 50,000 additional stores in Russia, four times more than the group currently operates. At the same time, a high entry barrier makes it difficult for new players to enter the market. MRG plans to open about 1,300 more outlets this year, 2,500 next year, and from 2023 to open 3,000 stores a year. The payback period of the store is less than 10 months, the opening costs are about 1.9 million rubles.
• In addition, MRG deliberately keeps prices lower than those of competitors: according to research conducted in the prospectus, prices at Red & White and Bristol are 22-27% lower than those of competitors.
• At the same time, the company's growth rate is indeed higher than that of other grocery retailers. In the first half of 2021, MRG's revenue grew by 26.5% against 9.5% for X5 and 7% for Magnit, analysts at VTB Capital Investments (one of the placement organizers) calculated. Net profit margin of MRG amounted to 5.8% (against 3.5% a year earlier), X5 - 2.1% (2%), Magnit - 2.7% (1.9%). The reason for this is high-margin tobacco and alcohol, which form the basis of the range of chains.
• Among the risks that could negatively affect the value of MRG's shares, the prospectus cites fierce competition, a ban on the online sale of alcohol and a possible decline in interest in it against the backdrop of a trend towards a healthy lifestyle. Buying MRG now is akin to a bet that the remote sale of alcohol will be allowed, says Alexei Antonov, chief analyst at Alor Broker.

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Dixy, Krasnoe & Beloe and Bristol networks announced the merger at the end of 2019. The combined company became the country's largest seller of alcohol and the third largest retailer. And already this year, the Dixy chain, which slowed down the development, was sold to Magnit for 92 billion rubles (we talked about this deal and how it changed the alignment on the market here ). You can read our story about the “Red & White” phenomenon and the mysterious deal between Studennikov and Kisaev here .