Slim gets fat on CompUSA - Grupo - Sanborns, - Brief Article - Statistical Data Included

Laura Heller

Mexican financier buys majority interest in retailer

DALLAS -- After faltering for nearly two fiscal years, CompUSA has received a welcome respite in the form of Mexican conglomerate Grupo Sanborns, which announced two weeks ago its intention to purchase the U.S. retailer. The deal not only rescues the troubled retailer from the pressure of Wall Street, but it brings in an array of new partnerships as well as retail, Internet, telephony and International opportunities.

Grupo Sanborns is the retail arm of Grupo Carso, a powerful Mexican holding company controlled by Carlos Slim Helu and his family. Slim, who is believed to be the richest person in Latin America and is ranked as the 27th wealthiest person in the world by Fortune magazine, joined CompUSA's board of directors last fall. His son, Carlos Slim Domit, is the chairman of Grupo Sanborns. The family's retail operations in Mexico include Sears de Mexico, which it purchased in 1997, the Sanborns chain of neighborhood general stores and Mixup, a chain of music stores.

The Slim family has a controlling interest in Prodigy, is a large shareholder in Apple computers, and owns SBC communications and Telefonos de Mexico, S.A. de C.V. (Telmex). The week before the CompUSA deal, the Slim family snatched up 9.4 million shares of OfficeMax, which represents 7.5% of the retailer's 125.2 million outstanding shares.

Grupo Sanborns purchased 14.8% of CompUSA in September 1999 for $86.4 million. The current deal calls for it to acquire all outstanding shares, or 51%, for $10.10 per share. The total cost comes to approximately $1 billion including a $50 million line of credit and $136 million due to Tandy Corp. for the sale of its Computer City chain.

In an unusual twist, Microsoft, SBC Communications and Internet service provider Prodigy will also be minority owners in CompUSA. While Grupo Sanborns will be responsible for acquiring all outstanding shares, it will then sell 49% to the three additional investors, retaining a 51% interest.

This group of investors presents some interesting opportunities for all involved. Of particular interest is the combination of electronics, software and telecommunications products and services, Carlos Slim Domit told DSN. "There is very big potential on the e-commerce side as well as telecommunications," he said. In Mexico, consumers often purchase PCs through Telmex when they sign up for phone and Internet service. Currently, product is supplied by such vendors as Apple and Compaq, but opportunities exist for the CompUSA-brand PC.

"From the Grupo perspective it's a great [deal]," said Rebecca Yarchover, analyst with US Bancorp Piper Jaffray. "It gives them telephony, distribution and Internet all wrapped up into one. That's pretty powerful." For CompUSA, "it allows them to make deeper investments and changes in the business without having to worry about market reaction," she said.

Yarchover has been one of the few analysts to remain positive about CompUSA and the changes implemented by management as they navigate a turnaround. She upgraded the stock in November 1999, citing, in part, Grupo Sanborns' minority interest at that time. According to Yarchover, Telmex sells approximately 1,000 PCs each day to Mexican consumers who also purchase Internet access. This presents strong sales opportunities for the retailer's PC division, and Grupo's ownership of other retail operations such as Sears Mexico could offer some unique store-within-a-store merchandising partnerships.

While Slim extolled the possible synergies, he said the primary focus for the moment is to work on CompUSA's core business and U.S. retail stores. "Our main focus is to run the company together with the management in the United States," he said. For now, current management will remain at the helm although after the offer is completed in 60-90 days, "there will be a closer examination of individual divisions and positions within the company to determine performance," Slim told DSN.

According to Yarchover, the purchase price represents a 50% premium over the retailer's closing price on the trading day prior to the purchase, and a 72% increase from early November, when it traded at just under $6 per share.

But $10.10 per share is a far cry from CompUSA's worth at its peak in April 1998, when it traded in the mid-$30s. In fact, it is less than the $11.50 per share that ShopKo paid to acquire Pamida last year. Over the past 21 months, the computer retailer has seen its stock price plummet--along with sales and earnings--as margins on PCs have shrunk, and the once-profitable business now faces new market challenges.

Management has been working on a comprehensive turn-around strategy that includes massive restructuring and job cuts; a spin-of its Internet business, cozone.com, into a wholly owned subsidiary; expanded CE products and game departments; and the exiting of some unprofitable sectors of business.

According to Slim, CompUSA still holds value in the retail market. "We feel that PCs as well as electronics and software will be very important for a long time to come," he said, combined with the positioning of the company, brand awareness and 217 locations.

In spite of lower sales and earnings, "CompUSA has had two consecutive quarters of the highest gross margin in the business, and are on track for a third," said Yarchover. "Clearly consumers are still shopping the brand." Gross margin increased 15.3% for the first quarter of FY00, ended Sept. 25, 1999, and 13.3% for the fourth quarter FY99, ended June 26, 1999.

Improving margins while exiting certain unprofitable sectors of business were part of management's turnaround strategy, although the full benefits of such a program have yet to felt. For the first quarter FY00, ended Sept. 25, 1999, the company reported a net loss of $12.1 million including non-recurring charges on sales of approximately $1.4 billion.

According to Ursula Moran of Sanford Bernstein, despite it's problems, "CompUSA continues to have some of the highest sales per sq. ft. in retailing --more than $1,000--and remains a leader in the sale of PCs and related products to consumers."

Yarchover points out that in spite of recent troubles, the retailer remains a cash cow. "CompUSA was actually free cash flow positive last year in spite of all the terrible things it went through," she said. "This quarter, the company ended with $128 million in cash vs. $151 million last year, despite redeeming its $110 million of subordinated debt."

The Slim family has a history of buying companies at a depressed stock price and profiting from the turnaround. That is a strategy it used with Sears de Mexico, Apple computers and now CompUSA. On the same day it announced this acquisition, the company also purchased approximately $90 million worth of Philip Morris stock when the company was trading at its four-year low.

The CompUSA deal was executed swiftly. According to Suzanne Shelton, CompUSA spokeswoman, Grupo Sanborns approached the company and came through with what was considered a "fair offer" over a weekend. Details were ironed out and an agreement drafted at 4:30 a.m., Sunday, Jan. 23. The news went out the next day. But Shelton admitted that the offer came as a surprise: "We were not shopping ourselves around."

Grupo Sanborns' recent investment in OfficeMax lends yet another interesting twist to this acquisition. Shares of OfficeMax have been trading between $4.50 and $12 per share for the past 12 months and at press time were steady at around $7 per share. According to analysts, OfficeMax's position in the market right now is very similar to CompUSA's, making it an attractive takeover target by a company with a history of such acquisitions.

Not so, said Slim. "Right now we are looking at OfficeMax as a minority-interest investment," he said. "All of our focus is on CompUSA."

Slim family businesses

* CompUSA, acquired January 2000

* OfficeMax, a 7.5% stake

* Prodigy, the U.S. Internet service provider

* Sears de Mexico, purchased in 1997

* Telefonos de Mexico, known as Telmex

* Sanborns, a chain of neighborhood general stores

* Mixup, a chain of music stores

Source: DSN research

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