Brazilian drugstore chain Pague Menos buys rival Extrafarma for $133 million

Industry:    2021-05-20

Brazilian drugstore chain Pague Menos agreed to acquire rival Extrafarma from industrial holding company Ultrapar for 700 million reais ($133.06 million), according to a securities filing on Tuesday.

Reuters had reported on the deal earlier on Tuesday, citing sources familiar with the matter.

The deal would make Pague Menos Brazil’s second-biggest drugstore retailer, behind Raia Drogasil SA. It is currently ranked third.

Pague Menos shares rose almost 10% in the day, while Ultrapar, which is mostly focused on fuel distribution, fell 1.2%.

Extrafarma will increase Pague Menos’ number of stores by more than one-third, to 1,503, and reinforce its presence in Brazil’s northern and northeastern region, one of the sources said.

“This deal anticipates our store openings strategy in three years,” Chief Financial Officer Luiz Novais said in an interview. This would be Pague Menos’ first acquisition since its shares were listed on Brazil’s B3 stock exchange in August.

Novais said Pague Menos will continue to open new stores, mostly in the southeast and central regions of Brazil.

Pague Menos, which is backed by U.S. private equity firm General Atlantic, will pay 300 million reais for Ultrapar’s stake upon regulatory approval of the deal. The rest would be paid over the next two years in two equal installments. Extrafarma’s equity value, excluding debt and cash, is around 600 million reais.

The deal is expected to create synergies of 150 million to 250 million reais over three years to Pague Menos’ earnings before interest, taxes, depreciation and amortization (EBITDA), mostly from higher sales. About 80% of it is expected in the first two years, the Pague Menos filing said.

In a note to clients, Bradesco BBI analysts said Pague Menos is offering the equivalent of around 1.5 million reais per Extrafarma store, the cost of opening a new one. But for Pague Menos this would mean a shortcut to its expansion plans, as an open store already generates revenues.

Still, Bradesco BBI said Pague Menos may be forced to close some stores due to some overlap.

Ultrapar decided to divest Extrafarma as part of a portfolio reorganization to concentrate on oil and gas. The group is in exclusive talks with Petrobras to acquire its Refap refinery in the southern state of Rio Grande do Sul.

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