Chinese fund buys $100mn stake in Russia's top toy store

Chinese fund buys $100mn stake in Russia's top toy store
By Ben Aris December 18, 2015

Russian conglomerate AFK Sistema has sold a stake in Detsky Mir, Russia's leading toy store, to the Russia-China Investment Fund, which is owned jointly by the Russian Direct Investment Fund (RDIF) and China Investment Corporation. The deal is worth at least $100mn and should be closed by the end of December, the company said in a statement.

Detsky Mir is an iconic brand in Russia, the equivalent of British store Hamley's, and associated with the New Year's present giving season. However, the Detsky Mir chain should not be confused with the flagship store of the same name that recently reopened and has stood on Lubyanka square next to the KGB/FSB headquarters since Soviet times. Sistema used to own that too as part of its Sistema Hals real estate division, but lost the asset when the company went bust after the 2008 crisis and was taken over by VTB Bank.

Still, the Detsky Mir chain has been an overwhelming success as despite the crisis, Russians don't scrimp on spending when it comes to their children. Russia overtook Germany to become the largest toy and children's good market in Europe several years ago.

Today, Detsky Mir is Russia's largest retail network specialising in children's goods, with a market share of 7-8%. It operates 370 stores in 136 cities in Russia and Kazakhstan.

The retailer's revenues grew 34% y/y to RUB40.0bn ($660mn) in 9M15, while its OIBDA rose 29.9% y/y to RUB2.9bn ($48mn), implying an OIBDA margin of 7.4%, reports Uralsib.

"The deal with the Russia-China Investment Fund was discussed last year but failed to materialize. An IPO of Detsky Mir could also be an option for Sistema," Uralsib analyst Konstantin Chernyshev said in a note.

The RDIF didn't disclose the size of the stake sold other than it was a minority stake and was worth "over $100mn". Earlier media reports suggested that a stake of about 10% could be sold.

The deal comes with a certain irony as Mikhail Shamolin, president and CEO of Russian investment giant Sistema said in an interview earlier this month that Russia attracting Chinese money was a "big myth." However, to be fair he was saying that Russia could not attract money into "inefficient" projects and Detsky Mir is extremely profitable.

"It is a big myth that we'll be able to attract Chinese or Asian money into inefficient projects or companies. This is not true. They will not invest," Shamolin added.

The deal will also be a feather in the cap for the RDIF and its boss Kirill Dmitriev, which has struggled to bring in as much investment as hoped. The fund was launched several years ago to co-invest with partners, but has failed to produce many deals. The focus of the fund has been reset in the last two years where the RDIF seems to have given up hope of attracting western investors and is concentrating more on working with the Chinese and Middle Eastern sovereign wealth funds, where it has had more success.

The deal may also be promoted by the Kremlin. Sistema owes the government some $777mn as part of a government-brokered telecoms deal in India that comes due in January. In an exclusive interview with bne IntelliNews this month, Vsevolod Rozanov, Sistema's chief financial officer said the company was looking at options for paying off this debt and was asking the government to delay the bulk of the repayments for five years or possibility refinancing the debt on international capital markets.

Rozanov admitted that because the debt was denominated in dollars the company was exposed to a currency risk and since the interview that currency risk has become manifest after OPEC nixed its production ceilings at the start of December sending the ruble plunging against the dollar in the last week. With the prospect of $40m oil becoming a reality the dollar-denominated debt increase in significance for both the company and the government.

"We would see the sale of a minority stake in Detsky Mir as a positive for Sistema, as it would provide additional cash, set a valuation benchmark for Detsky Mir and confirm Sistema's ability to make a profit on its investments. The stock remains undervalued, offering 46% upside potential to our target price of $9.6/GDR. We reiterate our Buy recommendation," Chernyshev said.

Sistema's stock has outperformed the RTS index this year and was up 23% YTD and 35% y/y as of December 18.