Wal-Mart's Mexico unit sells restaurant chain for $626 million

Wal-Mart de Mexico is selling its Vips restaurant chain to Mexican restaurant operator Alsea for 8.20 billion Mexican pesos ($626 million), allowing Walmex to focus on other retail operations and adding some homegrown flavor to Alsea's portfolio of international brands.

The companies said in separate statements Tuesday that Alsea, which manages franchises including Domino's Pizza, Starbucks Coffee, Burger King and California Pizza Kitchen, will acquire Walmex's 362 restaurants. The deal comes after Walmex said in June that it was seeking to sell the restaurants to simplify its operations. Analysts had estimated that the restaurant portfolio could sell for 4.6 billion to 10 billion pesos.

The Vips chain is focused on a demographic segment—the middle class—that Alsea currently doesn't serve, Alsea Chairman Alberto Torrado said. It mostly offers Mexican fare, and has a market share of 11.7% and 99% brand recognition, Alsea said, calling the chain an "icon" in the Mexican restaurant industry.

Company officials had commented in recent months about their desire to add a Mexican food concept to Alsea's portfolio.

Grupo Gigante, which owns the Toks restaurant chain, said late Tuesday that it had also bid for Vips, offering Walmex 9.13 billion pesos ($697.5 million). A person with knowledge of the Vips sale discussions said that private-equity firm Advent International also took a look at the restaurants. Officials at Advent weren't immediately available to comment.

Many of the Vips restaurants are situated in prime locations in areas with heavy foot and vehicle traffic. Alsea will own the restaurants' brand rights while paying rent on a handful of sites that are housed within properties that coexist with Walmex stores.

Mexicans are increasingly eating in restaurants, as steady economic growth fuels consumer spending and as cultural habits change. An increasing number of women are working, a trend that is boosting takeout orders at restaurants like Vips. Meanwhile restaurants haven't kept up with demand from an increasing flow of clients to brick-and-mortar establishments from traditional street-side stalls.

Alsea plans to finance the purchase with a 3 billion-peso long-term bank loan and via a 5.20 billion-peso 12-month bridge loan. The company said it is analyzing alternatives to reduce its debt load following the transaction.

Given the size of the deal, Credit Suisse analysts said in a note that Alsea might need to issue equity to help finance it.

Walmex has signed a services contract with Alsea to help smooth the transition for personnel and services.

The Mexican unit of Arkansas-based Wal-Mart Stores Inc. is the country's largest retailer and biggest private-sector employer.

Walmex's restaurants posted earnings before interest, taxes, depreciation and amortization of around $74 million last year on sales of $473 million, accounting for just 1.7% of Walmex's consolidated sales. Over the years, analysts came to view the retailer's restaurants as a distraction.

Meanwhile, Walmex sales have been weak this year, as the retailer struggles to get more customers into its core grocery and big-box stores. And the company has spent considerable time and resources to tighten internal controls since allegations emerged in April 2012 that it paid bribes to speed permits for new-store openings in Mexico. Those corruption allegations remain under investigation. Wal-Mart has said it is cooperating with investigators and told U.S. authorities in November 2011 that it was investigating potential violations of the U.S. Foreign Corrupt Practices Act.

(Published by WSJ - September 11, 2013)