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. Last Updated: 07/27/2016

X5 Issue Could Finance Acquisitions

bloombergX5, created by the Perekryostok-Pyatyorochka merger, is focusing on European Russia and Ukraine, Khasis said.
Leading food retailer X5, controlled by Mikhail Fridman's Alfa Group, is mulling an offering of new shares to finance acquisitions, it said Friday.

CEO Lev Khasis said X5 was considering raising from $1 billion to $2 billion in new equity for both organic growth and acquisitions. The retailer has an option to buy the Karusel hypermarket group from Jan. 1, 2008.

Khasis, speaking on the margins of a retail conference in Spain, said the timing and the amount of the new share issue would be decided in the next two months.

"If we were to undertake the acquisition of Karusel or other operations, these initiatives would require additional capital, and we are currently reviewing the possibility of a secondary offering," Khasis said, reiterating an earlier statement.

Khasis said that, subject to shareholder approval, the issue would be made in London, where X5's global depositary receipts are listed, and possibly on one of Moscow's stock exchanges.

X5's GDRs fell by over 2 percent to $27.75 on fears that existing shareholders would be diluted.

Victoria Grankina, retail analyst at Troika Dialog, said those fears were exaggerated. In a note, she kept her "buy" rating on the stock and a price target of $40.25, assuming that X5 raises $1.2 billion on equity markets.

Khasis added that X5 was in talks about possible deals. "We have a lot of negotiations and at least a dozen companies are in negotiations with us, and for sure, probably we'll buy something from them," Khasis said. "Throughout the year, at least a couple of acquisitions will be completed."

X5's interest was in the European part of Russia, Khasis said. He added that X5 was also looking at organic and acquisitive growth in Ukraine, where it aimed to be market leader.

The company, which has a market value of $6.4 billion, was created last May through a merger between discounter Pyatyorochka and supermarket chain Perekryostok. Its option to buy Karusel -- owned by two shareholders in X5 -- was agreed at the time.

One of Karusel's owners has said, however, that talks on a possible sale to U.S. retail giant Wal-Mart were under way, creating uncertainty over whether X5 would indeed be able to complete the acquisition.

X5 has also recently postponed a 25 billion ruble ($960 million) bond issue, citing unfavorable market conditions. Khasis said the bond offering would go ahead "as soon as market conditions make it attractive."

Analysts doubted that X5 would issue as much as $2 billion in new equity, saying it would probably opt for a mix of equity and debt to finance takeovers.

Natasha Zagvozdina, retail analyst at Renaissance Capital, said the entire new share issue would probably not go toward the purchase of Karusel, whose enterprise value she estimated at between $1.2 billion and $1.5 billion.

She named retailers Kopeika and Ramstore as other potential targets. "We think that X5 will go for a debt and equity combination to fund its aggressive expansion plans," she said.