Magnit completes acqusition of Dixy

Krasnodar, Russia (July 22, 2021): Magnit PJSC (MOEX and LSE: MGNT; the Company), one of Russia’s leading retailers, today announces that it has completed an acquisition of the DIXY retail chain with 2,477 stores in Russia.

Assets required

According to the agreement Magnit has acquired DIXY Holding Limited, a holding entity for a group of companies that operate 2,438 convenience stores under the DIXY brand and 39 superstores under the Megamart brand. The majority of the convenience stores are located in Moscow and the Moscow region (1,319 outlets) and in St.Petersburg and the Leningrad region (438 outlets). The remainder of the stores in the convenience format are located in the Urals Federal District. Most of the superstores operate in the Sverdlovsk region (35 outlets) with 4 stores located in the Tyumen region. The stores are comparable in terms of size with existing Magnit convenience (298sq.m for Dixy vs 342sqm for Magnit) and superstore (2,013sq.m for Megamart[1] vs. 2,002sqm for Magnit) formats. As part of the transaction Magnit has also acquired five distribution centers and a fleet of approx. 700 trucks.

Assets	Federal district	Number of stores	Selling space[2] (thousand, sq.m)	Ownership (leased/owned)	Sales in 2020 (Rub, bn)
Stores		2,477	804	84% / 16%	273.6
Dixy brand	Moscow, St.Petersburg Central, North-West, Urals	2,438	725	90% / 10%	256.7
Megamart brand	Urals (Sverdlovsk, Tyumen)	39	79	28% / 72%	16.9
Distribution Centers	Moscow, St.Petersburg, Urals (Chelyabinsk)	5	151	29% / 71%	-

Strategic rationale

The acquisition of the retail business of DIXY, the fifth largest grocery retailer in the country, is expected to significantly strengthen Magnit’s competitive position in the Russian food retail sector. Strong exposure to the strategically important Moscow and St.Petersburg regions, which account for approx. 29% of the total Russian food retail market[3], will lead to a sharp increase in the Company’s market positions in both capitals, including more than two-fold market share growth in both Moscow and St.Petersburg. Strong physical presence in Moscow and St.Petersburg will provide substantial support to further development of Magnit’s e-grocery initiatives. Potential synergies in procurement, category management and various business processes are expected to benefit the Company’s customers and provide value accretion for its shareholders.

Approvals, financing and closing

The transaction has been approved by Magnit’s Board of Directors on May 18, 2021[4]. Russia’s Federal Antimonopoly Service announced its clearance to the transaction on July 15, 2021 and all other conditions to closing the deal have been met. The parties have closed the transaction through Magnit’s main operating subsidiary JSC “Tander” having acquired 100% of shares in DIXY Holding Limited (Cyprus). The transaction was financed using Magnit’s existing cash and available undrawn loan facilities.

Deal value

The purchase price at closing amounted to Rub 87.6bn. Certain closing adjustments related to the number of stores acquired were made compared to the initial aggregate base transaction consideration. Further adjustments to the purchase price will depend on the net debt and working capital as per completion accounts to be agreed by the parties. The parties have agreed to include 2,477 stores in the deal perimeter, 174 less than previously communicated, with some outlets closed or opened since the original agreement was signed and another 148[5] excluded from the deal perimeter according to the FAS instruction and market share limit thresholds.

Integration and potential synergies

The DIXY business is expected to remain a separate legal entity with the stores operating under the existing brands. Dixy’s current management will continue running the business while Magnit welcomes frontline, supply-chain and head office employees to join its team.

Depending on the quality of locations, the overlap with the existing Magnit stores, operational and financial performance, some adjustments to the Dixy and Megamart chains are possible at a later stage. This may potentially result in a limited number of closures, transformation into Magnit convenience, supermarket, drogerie formats or a hard discounter concept, store redesign or reformatting to dark stores. These decisions will be made gradually based on extensive case-by-case studies of post-synergies economics. The same rationale may apply to Magnit’s own store opening program in the respective regions, which may become subject to slight adjustments.

While Magnit’s team continues further analysis integration will start immediately with the key focus on deriving synergies in key business processes. The Company expects to see material synergies first of all in procurement and category management thanks to the combined purchasing power with national and local suppliers, as well as in direct import operations, seasonal and Magnit’s exclusive product range. Given high loyalty to private labels and Magnit’s own production capacity, certain synergetic effect may be achieved from combined sourcing and increased utilization rate of production facilities.

The Company will also start aligning all procedures in strategy and investment decisions, accounting, financing, treasury, internal audit, legal, marketing and other functions. Cross-synergies may be also achieved in IT and personalization as well as other technologies used in operational processes.

The Company will also start aligning all procedures in strategy and investment decisions, accounting, financing, treasury, internal audit, legal, marketing and other functions. Cross-synergies may be also achieved in IT and personalization as well as other technologies used in operational processes.

Implications for FY 2021 and long-term guidance

The Company will start consolidating the newly acquired legal entity from July 2021. At this stage Magnit’s full year 2021 store opening, redesign and capex guidance published on February 4^th, 2021 remains unchanged. Based on further detailed analysis of the performance of the newly acquired stores the Company may decide to slightly adjust its organic store opening and refurbishment programs in the respective regions. It is expected that any adjustment, if and when it happens, will not lead to material impact on the Company’s development plans.

Strong cash generation, further improvements in working capital and a healthy financial position will continue to support Magnit’s expansion, redesign program and investments into efficiency projects. The Company’s leverage at year-end is expected to remain at a comfortable level. The transaction will not limit Magnit’s ability to continue strong dividend payments.

The Company’s 2025 targets announced on February 18, 2021, including store openings, redesign, e-commerce development, margins, working capital improvement, leverage and dividend payments have also been confirmed without any changes.

Charles Ryan, Chairman of the Board of Directors, commented:

“This transaction is a testimony to the structural changes in the Russian food retail industry and a mark of the success of Magnit’s turnaround story. The Company has developed sufficient financial flexibility to execute an ambitious expansion program, combined with selective bolt-on acquisition opportunities and exploration of promising new niches. The Board is fully confident that this deal will benefit our customers and provide value to all our shareholders.”

Jan Dunning, President and CEO of Magnit, commented:

“We are delighted to complete this strategically important transaction. We are now focused on executing gradual integration which is the largest incorporation of acquired assets in the history of the Russian food retail industry.

At the same time, this process will not affect Magnit’s own expansion program and its ongoing retail and digital transformation.

We expect to achieve first quick wins by year-end 2021 and complete the integration process with the extraction of all strategic synergies in the second half of 2022 or the first half of 2023.

Above all, retail is about people. We are pleased to welcome a team of over 40,000 strong professionals at Dixy to the Magnit family.

I have no doubt that merging two strong corporate cultures will reinforce the best of our leadership capabilities and help us to build a unique winning culture in the Russian food retail sector.”

[1] Including Megamart and Minimart brands

[2] Warehouse space for distribution centers

[3] Data combined for Moscow & Moscow region and St.Petersburg & Leningradsky region for 2020 according to Rosstat;

[4] https://www.magnit.com/en/disclosure/regulatory-news/#tabs-Disclosure;

[5] Including 142 stores under FAS instruction to comply with the 25% market share limit in 53 municipalities and 6 stores in the municipalities with combined share of top retailers above 50%