Sergei Galitsky, founder of Russia’s regional supermarket chain Magnit, has called it a day and sold most of his shares to state-owned banking powerhouse VTB for RUB138bn ($2.4bn).
Long an investor’s darling, Magnit has lost its mojo in the last two years and has been overtaken in revenue and market capitalisation by its close rival, the X5 Retail Group, which is part Mikhail Fridman’s Alfa Group.
Galitsky will remain a minority shareholder with 3% in an investment deal signed on the sidelines of the Sochi Investment forum this week, Vedomosti reported on February 16.
Galitsky has become something of an investment icon in Russia. Over the last 25 years he has built the company up into a $10bn business by defying convention and eschewing Moscow to focus his retail chain on the small cities and towns in the regions. Personally he also eschewed the oligarch high life of designer yachts, former model wives and London town houses; despite being worth several billion dollars he has continued to live modestly in his native regional city of Krasnodar where the company is also headquartered.
“I have run the company for 25 years but it is time for something to change in my life,” Galtisky said, cited by Vedomosti. It seems that he has become tired of work and the management has been riven recently by internal conflicts over its direction. Galitsky called the decision to sell a stake in Magnit a difficult one and admitted he and other shareholders have different views on the development of the company. “The sale of VTB shares is the best solution, as the bank has great ambitions,” Galitsky said.
There is no buy-back option in the deal, said Galitsky who added that even if one were offered he wouldn't want it. “If you are going to leave, then leave. Magnit will go on without me.”
The sale has not come entirely out of the blue. In early 2016 Galitsky warned investors that he planed to sell about 1-1.5% of the company a year in the coming years to finance personal projects. He sold $700mn worth of shares in November as part of this programme following on from the sale of 1% worth $143mn in February 2015.
Off the boil
Part of Galitsky’s decision to throw in the towel must be connected to the problems the company has faced in the last two years. While for most of the last two decades the company has grown fast, and on top of that been one of the most profitable in the sector, thanks to the lack of competition in Russia’s vast hinterland, in the last two years sales growth has slowed.
The company’s focus on the regions has become a weakness during the economic slowdown that followed the global financial crisis in 2008. Russian incomes have halved since then but the fall disproportionately hit the regions. Russians have responded by trading down to cheaper made-in-Russia products, while the share of food in the average shopping basket has risen from a low of 35% in the boom years to more than 50% now.
That has hurt Magnit, which reported disappointing 2017 financial results and cancelled plans to pay dividends. Magnit missed its revenue growth forecasts for 2017. Sales rose by only 6.4% to RUB1.14 trillion against the expected 8-10%, while the revenue of X5 was up 25.5% y/y.
Despite recent indicators that Russians are going back to the shops and spending more, the recovery is starting in the big cities and so favours Magnit’s rivals.
Magnit’s main competitor X5 over took Magnit at the end of last year to become the biggest retailer by revenue in Russia. This week X5 overtook Magnit as the biggest retail by market capitalisation, topping $10.05bn to Magnit’s $9.9bn.
A visibly irate Galitsky responded to journalists' questions at the time, commenting: “The goal is not to be the biggest retailer in the country but the most profitable!” But it seems that neither the rest of the management or portfolio investors are convinced of this argument.
Magnit’s shares have barely moved in the last year, finishing 2017 essentially flat, while those of X5, and those of the third horse in the race, retail chain Lenta, have soared.
The slowdown has clearly led to internal disputes in the company over strategy. Magnit announced it was dropping plans to develop a pharmacy chain in January after top executive Sergey Goncharov quit. He had been tasked with developing the cosmetics and pharmacy formats for the retailer.
"I left because I don't see a future in the company," Goncharov told Vedomosti at the time. Under Goncharov the cosmetics and beauty formats saw sales rise 13-fold and ebitda 22-fold in 2013-2016.
VTB Chairman of the Board Andrey Kostin told reporters that he expects Magnit's capitalisation to grow and the bank knows the business well. VTB Capital’s Alexei Makhnev has been an independent director on Magnit’s board for several years and Galitsky has been the same on VTB’s board since 2015.
Magnit’s board of directors is due to meet today and the current CFO Khachatur Pombuchkhan will be appointed as the new chairman of the board, according to reports.