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    S-Mart - Credit Memo PDF

    Uploaded by

    Daniel Ahijado

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    © All Rights Reserved
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    of 36
    Project Bazar Credit Memo Prepared ancalSporao US \axam co sya -Us onc inos INTERNAL sony Comoe ate: September 15,2018, a Bann Comte Mesa seus ‘Summary & Transaction Overview HSBC has been approached by aconsortum formed by Global Potty Sponsor Advent Intemational Advent”) ‘and Regional Proty Financial Sponsor Southern Cross Group (Souther Cross" of "SC", ad together "the Financial Sponsis") to potently act as Financial Adviser, Joint Lead Arranger and Joint Bookrunner and to provide commit Mancing associated wih ther proposed acquistion of SMart Mexicana SA. de CV, Propulsora de Proyectos S. de RL de CV, Promotora de Negocios S-Mart S. de RL. de CV. (together Mart’) and Larrc. Ie. Lac) (egether. “Grupo S-Mat™ tha "Taga the "Company fom the ‘arehoders of Srupo S-Mart the "Transaction’) Grupo S-Mart hes engaged Citas sell side advisors. The sale process has atvacted significant intrest from ‘various leading prvate equity thms and strategic investors and the Financial Sponsors have bsen shortlisted into the nal stage folowing indicate fst round bics. Final ound bid are cue September 25° In support of the Financial Sponsor's final ound bi, HSBC has been asked to underurte 100% of the acquition financing which we have summarized below Financing Overview: “The Financial Sonsors are contemplating making a final bis or Grupo S-Mart at a otal Enterprise Value ofc NXN143 billon 8 0x 2015E EBITDA of MN1 8 billon) and o fund the Transaction by ralsing a MXN. billon {bt financing package equivalent to 4.1x leverage) and contibuting MENS 5 bllon of equ (56% of ttl consideration, ‘The Financial Sponsors itond to sel the real estate assets of Grupo S-Mart within 6-12 months of cosing of the ‘Transaction andto keep the operating business going forward, The realestate asses tobe sold. which include {36 owned stoes and 16 strip mal, are curently estimated to be valued at MXN2,023 million (8.0% cap rate on FY 2015E NOI o' MXN162 millon the “Asset Sale’). AS such, the debt facing wil be structured as flows: = MXN6,300 milion § year Term Loan (3.x FY 2015 PF EBITDA) THE+400 bps subject to leverage ‘based fd, 1.875% upont foe (HEM wil underwrite MXNS,200 milion and hold MXN, 060 milion (Up to 20% othe fait) = _MXN1,300 milion 18 month Bridge Loan to Asset Sale (0.8x FY 2015 PF EBITDA. 65% Loan to Value ofthe realestate asset) TIIE+325 bps subject to time based gi, 1.35% upfont fee (HBMX wil Lnderwtte NXT. 300 mifon and hols MNA33 milion (Upto 39% ofthe fac) ‘We would look te e-isk immesiatly aftr signing commitments and ater the transaction is announced by bringing in 2-3 oter Bookrunners and reducing our exposure to 33% across both ranches. Bookrunners would arpa in the Term Loan and Bridge Loan facies with economics and roles on potential take-cuts shared ‘008 pro rata basis. Once the transaction is anchored, we would approach ater banks during general ‘synleation to reach our expected hold within 3 months, Te LatAm Loan Syndicatons team is highly confident ‘nou abilty to achive the target hold levels wihin the stated timeframe. \We expect the Bdge Loan to be fly repaid with proceeds ttm the Asset Sale within 6-12 months. The Financial Sponsars have sited ther intention to run a proper sale process with potential buyers fr these ‘assets including Planigrupo (a RealEstate company wich operates mals in nortnem Mexico and is also owned by Southern Gress and a Mexican family), other strategie Investors and REITs in Mexico, HSBC's Commercial Rea Estate team (Juan Carios Mir y Teran ~ Head of Commercial RealEstate, Mexico) has reviewed the transaction and is comfortable withthe size and LTV ofthe Bridge Laan rancing given the preiminay value of the assets. Any excess of the sale price over the Bridge Loan would be applied to reducing Term Loan debL as the Financial Sponsors have stated thei intention to reduce leverage below 3 5x as quickly as possible Both loans willbe disbursed to an SPV created by the Financial Sponsors, secured by the Targets realestate ‘and shares, as wall as the guarantees ofthe operating companies. Southern Cross has indicated the intention 's to merge the SPV withthe operating companies to resultin nly ene company, Request for Credit Approval: We are seeking cect approval to underwrite 100% ofthe MXN6,600 milion financing across the Term Loan ‘and Bridge Loan to be booked in HBMX's GB balance sheet. We target afnal old of MXN',060 milion in the LNTERNAL 1 ‘Term Loan fecity and of MXN433 milion in the Bridge Loan facity within 3 months to be booked in HBMX's (CMB bolance sheet We expect that within 8 months the Bridge Loan wil be prepaid and HSBC's exposure \would be limite to tre Term Loan component (CMB and GB have ayresd that GB will underwrite both facilites, onboard the cient and ead the ert approval Process, with CMB broking the hold amount folowing the syndication and receiving coverage ofthe Target relationship going foward. We received a DPC clearance for the proposed transaction on September B®, 2015, “The transaction i suported by Davis Morin (Head of GB, LAN), Carls Correa (Head of CMB MME, Mexico) ‘Alfonso Fiero, (Head of GB Mexico), Robert Lipps (Head of FSG, US), Nicolas Delamer (Director, LAF, US) ‘and Juan Carls Mer ¥ Teran(Director, Real Estate, Mexico). Crit approvals ecuested as soon a8 possible and no later than COB on Thursdav September 24,2015 ‘such that we can submit a Commitment Letter tothe Financial Sponsors by their Soptember 25,2015 leading, GRR LGD / FG: HBMX WCR assigned a 42 CRR tothe Borrower (representing @S-cch downgrade ram the ‘company's current 32 CRR) and LGDs of 40% forthe Term Loan and of 30% for the Bridge Loan (gen that the Bridge Loan would benef excusvely ftom te realestate colateral). See Appendix for further justification, Grupo $-Mart (Target) Overview: Founded nearly 40 years ago, Grupo S-Mar is the bh largest grocery retain Mexico and one ofthe lang ‘grocery reals in the Northern region of Mexico, witha strong presence in key cites along the US border. AS ‘of March 2015, the Company ha a total of 6 supermarkets (36 owned) with over 12,400 employees. Grupo S- Mat has a distinct va proposion which focuses on enhancing customer experence through superior qualty, ‘uaranteed freshness, broad assortment varey, 24-hour service efcent box izes and convenient and ‘appealing layouts. While the major of revenues are derived from supermarket etal sales. the Company is @ ful integrated business and also includes the flowing value-adcing Independent business: Lar: US-based procurement operation which purchases products ouside of Mexico that are sold in ‘SMart supermarkets ~ Dolifoods: Centralized kitchen facies, located nes to stibutin Genes, spas ad processes food product obe sod in supermarkets + Taurus: Fleetot 112 full-owned GPS-equipped trucks and 311 tralers supportng anspor of merchandise ftom Laroe eoss-docking facies tothe 3 company-owned dstbution centers = Reciciamex: Processes and sells materia used and discarded in supermarkes,cstioution centers ‘and Delfoods In 2014, Grupo Mat actioved revenue ofc, MXN',036 millon and EBITDA of MXN 1.472 millon (EBITDA margin of 92%), ‘Note: We have assumed an USDMXN exchange rate of 17.0 for all nancial, including projections, throughout the cred memo. INTERNAL-2 Transaction Structure Sources and Uses Fi rani Di el on 15700} Net Based on FYEZOTSE EBITDA 7 USOM mil NDNT, 58 ion ro Forma Capital Structure Tea Caan8 Buna 0 2 ox Nw tet Be 1300 78 om samara Tae 32598 New frm taan S300 so 3h "Syren xno 500 ‘0 ate ‘Serr Easy 523 01 sae Tat ceptatnton 516328 00 se ‘apining Opin esees™ 18 @ Tem aguses Dot san ser at HSBC Economics. ‘The table below illustrates HSBC's expected foes in connection withthe proposed transaction and assuming @ 'NXN1,060 millon tna holdin the Term Lean faity and MKN43 millon final old inthe Bridge Loan faci We have assumed we pay away 162.5 bps on the Term Loan and 110 bps on the Bridge to Asset sale on the sel doun, ‘The total financing fees earned onthe Transaction exclucing any advisory fee are expected tobe approximately [MXN milon (USO2-3m equivalent, ims, “The advisory fee is curently under discussion, estimated at between USD2.5-USD4.0 millon (MXNSO-S7 sion equivalent) Timetable Below is an dicate timeline based on our conversations with the Financial Sponsors. The Financial Sponsors ‘ate seeking hancing commiments from HSBC by Friday, September 25° in order o presert ter final, binding ‘offer for Grupo S-Mart. Assuming the offers accepted, we expect an SPA tobe signed shodly thereafter and the Transacton tobe announced. The transacton wil be subject to customary Mexican reguator approvals however the Financial Sponsors do not anticipate issues since they do not have any overlapping business in INTERNAL. the space. Additonal, the Financial Sponsors are considering to include @ minimum valuation of Grupo S- Marts eal esate assets conducted by a Third party as a CP to closing. Fil cred approvals ‘Septonbor 250, 2018 HSBC exccites commiment papers Frade doe + SPA erected Lauren synlcaton 23 stlonal underrter / Bookrumere Comments ue fom adional underwtiters/Bookners estes HSBC exposure reduced to 59% the Bide Loan Fait and Term Loan ary (Mid October 2015 Fact Launch ret synscation of Ter Loan Commitments due fom bank tal synieaton of Tem Loan HSBC exposure reduced 20% nthe Te Loan fey EndofDecomber 2015 + Regulatory approvat rected ‘eto sbstonal Cte dosing ‘eatin Coco Rea! Estate Asset Sale closes ‘Bigs to Asset Sle acy uly repaid Deisking Timeline ‘We expect fo have ful support fromthe Company and ts new shareholders during synlcaton to make sure we us Jationshps and potential for future business. We woul nally approach 2-3 banks to jin the transaction as Bookrunners wih appetite fortis kindof transactions to reduce our exposure to 33-50%. ‘Bookrunners woul be requied o jin both transactions with econemie and oles on potential take-out shared ‘on pro rata basis. Once the transactions anchored, we would aporoaca other banks duting general ‘synolcation to reach our expected hold thin 3 month sharing on average 162 5 bps on the Term Loan and 110 bps onthe Bridge to Asset Sale. Transaction Rationale Southern Cross Overview: Southern Cross is a successful investor in Latin America with presence in 7 countiein te region (Mexico, ‘Agentna, Brazil, Chile, Colombia, Uroguay and the US). The private equity fund has completed over 20, investments inte region including 2 inthe etal space and 6 in Mexico. The same team that partciated in their previous engagements in etal wil participate inthe evaluaon ofthis investment epoorunty enfancing tte weans capabilities forthe success of tis ansacion, ‘SCs success and rack record has helped the fund bulla strong and stable investor base, Limited Parners Incude wel-espected Industral groups, pension funds and leading global endowments, foundations and sovereign wealth fund (currenty~140 Limited Parners, most of them investing with SC fr over a decade). From the USS2.90n of aggregate commitments, 2% come fom SC employees, evidencing thats ivastment Professionals have contdence i he investment teria and potential o generate retums. ‘Souther Cross Investment Thesis ‘+ Invest in Latin American compsnies wit assets tat, when deployed with a focused srategy, led by an ‘cutstanding management an with appropriate capital structures, wil achieve a sustanable competitive ‘advantage in their markets ‘Strategy is philosophy and not sector specif Leverage the experience ofits partners by working together wth management teams x establish rel, ‘Sustainable value over multiple years and crete great companies INTERNAL 4 ‘Advent Intemational Overview: Founded in 1884, Advent International one ofthe largest and most experienced global private equly fs. \Wan oftes on four continents, thas a globally integrated team of over 180 investment professionals, focused ‘on Buyouts and growin equity investments in ve cove sectors, ‘Sine Intating thelr private equty strategy in 1980, Avent has invested ~USS28bilon in over 200 transactions. ‘across 40 counties, and as of March 31, 2018, manged ~U'SS32billonn assets. Today, as we aid more tan 30 years ago, we seck to invest in wel-postioned companies and partner with management teams to creale value through sustained revenue and earings growth, ‘Advent Intemational Investment Thesis: ‘+ Advent employs a long-established strategy of operationally intensive, sector-ocused investing across Nodh Amerca, Latin America, Europe and Asia ‘+ They 6o0k to invest in wel-postoned companies with operational and strategie improvement potential ang partner with management teams to create value by driving revenue ang earings grown '+ Advent does not designate a xed percentage of capital any particular geography or sector + Tha fina ean mgnond ta changing market conditions and dynamically slate eaptal and resources tothe most atractve investment opportunites across ou target markets Transaction Support Statements ‘cus support: “Two of the prories of CME Mexico are to enhance and dversity our Customer Base. Grupo S-Martis not curenty a CMB Customer, however the prof of tis Customer andthe Industry in which i operates, present {or us a good opportunity to onboard anew celationship wth @ high potential of business. The size anc the local ‘soope of busines primarily inthe border region of Mexico, makes the Company an excellent candidate to ‘develop the Relatonshp wii the MME Team. Adctonally to credit, we fresoe with this group ancilay business coming from PCM, GTRF and Global Market products, Addtonaly, gen banking coverage through ‘he CMB Team to Companies owned by Financial Sponsors that are cents of Global Banking i leo a pronty ofthe CMB Team in terms of internal colaboraton. This propased transaction has the ul support rem the CM Moco, = Carlos Corea, CME Head of MME Mexico! Juan Cars Perez-Carmona, CMB Structuring Director 68 Support: ‘This transaction in support of Southem Cross and Advent not onl represents an excellent opportunity to play 8 ‘major role in sizeable acquisition wth significant financing ad advisory fees, but also the possibilty of ocking ina new cient for CMB wih the major of the targets anciary income in PCM, Paycl, GTRF, FX, ete, Given ‘equality ofthe asst and the spreads invoved, our exposure shoul be reduced fay quickly via syndication inthe quid MXN bark market. The realestate assets are also expected tobe successtly sald to one ofthe Fnancial Sponsors portobo companies within 6-9 months, resulting ina moderately everaged (3x3 5x) company going forward. GB is fly supportive of he transaction andthe subsequent transfer of the target's coverage to CMB, ~ Alonso Fiero, Head of Global Banking Mexico Financial Sponsors Group Support ‘Avent Intemational sa Gobal Pronty Sponsor fr the Financial Sponsor Greup, owing to our strong relationship with hem, their reslience under citicu market conditons and inreasing focus towards emerging markets. The FSG team interacts with Advent ona regular bassin order to develop the relationship and ciscuss potentially sutable investment opportunities, HSBC is bulding a strong retatonship wth Regional Privy Sponsor Southem Cross and we are constanty locking at opportunities with them on financing and advisory work. Notably, Southern Cros recently mandated HSBC as 2 Joint Bookrunner forthe IPO of one oftheir portotio companies. In the context of the relationship we ‘2 building with Southem Cress, we beeve that supporting them inher potential acquisition of Grupo S-Mart would be a great step forward, Given the above considerations, the Financial Sponsors Group fly supportive of his transaction. = _ Robert Lipps, Head of Financial Sponsors Group, US LAF Support “Tis transaction presents HSBC's Leveraged Finance team with an excelent opportunity to actin a lead ‘capacity on a large, acquisition fnancing led by leading francil sponsors (Advent Global Prionty Sponsor ‘Southern Cross — Regional Pity Spans), whi ale racniving satan fee across the financing and ‘atvisoy roles. Multiple deal teams across product and sector have put considerable effort into the structuring and fhancing ofthe deal and have established a song, rusting relationship with the Financial Sponsors. Our Fle comes as a rect result ofthe continued strategic, value-add calogue with these sponsors, The deal tam 'shighly confident of achieving successful syndication in the transaction given the characteristic ofthe bower, stength ofthe nancial sponsors involved, proposed underwriting terms and curent market ceandtons. = _ Nicolas Delamer; Director, Leveraged & Acquisiton Finance, Americas Real Estate Support Based on the preliminary information received on the RealEstate properties of S-Mart, wich includes owned ‘bres and stip mals and based on cartan projectons received, appraleas for some of ts properties shown In the dala room and our intemal analysis, we are supportive ofthe terme of MXN 1,300mm the Bridge Loan, Insuding the 65% loan to value proposed forthe Briige Loan. \We performed various analysis at conservative capitalization rates (higher ates to the market where S-Mart ‘operats) to suppor the proposed LTV ofthe portfolio. although there are no market comparables fr ness 'ypes of properties, we are comfortable wih the intial assumptions used, ~ Juan Cares MlerY Teran, Director Real Estate, Mexico Summary Term Sheets ‘The below summary term sheets iustate the proposed underuring tems as presented to the Financial ‘Sponsors. The terms are subject to change uni we receive fal commitment papers but we expect commercial tems in line with whats shown. Term Loan Meican Speci Purpose Vehide TSD ‘SMart an operating subsaros comping teat 90% of consoled asets and ‘onaoidated E8'TDA PER 22 St 00 rst tees 4 tn secs te, HSBC Mexio or sy faints, and eyncate of banks EEE Serie: s0c1105 term oan fecity MEETS 100% oF tho shares ofthe Target a Aetna {pte 0m US08tmion ee) pt 10% othe rat Are 09 920% ofa ey Anat a 5. WEXEEIRIEINN 30 — One yor grce (sat to amortize in year 2) and average ie no longer than 4 years Tolal Debi EBITDA 4.0x< 45x THE +400 base pints Cpe) per annum Cpa) Total Dett/EBDAs 3ex24ox —THES350, Total Osbt EBITDA <3 Te +300 1272s Customary fr ransacSons of his natu, which wi include Amato, Negative and Francia [Conenants (ech but not ited to Toll Det o EBITDA of xox Year 40 or Year 2 snd 3.5 fr Years 3 o 8), Ropresoratons and Waa, Consens Precedent to long, {Condons Precedent o Drawn, Mandatory Prepayments, Maret Plex (marge, ‘Suey ostuctre) and MAC Clause ameng others SETI ow York or Mesican Law Bridge Loar cm Mexican Spel Pups Vehicle TBO ‘SMart and operating subsidies comprising at east 90% of consodtad ase oneokdated “TOR (USA) Ie. HSBC" or HSBC Mica, A, Ietucon de Bance Mule, HSBC (HSBC tesco) HSBC Mexico or any of afte, and 2 syneate of banks Serio ecu term lan ft MESO Comercial roperies porto and 100% of shares inthe Target Axton ck Ta os oe ts {Up to Mx 300m (US076 min sv) (TBD sed on 265% LTV St ng) ESET Uo 10 100% cre Facaty Amount p10 3% ofthe Facity Amount EE 18 rons oa [Al proceods fom te Asset Slee. posl fhe real estat asec the Target) mutt be ppd towards repayment ofthe acy and oor proilos castomar tr ranean of ts tire Months +8 THE +2759 Mone 12 TWEs 325 tps Months 218 TUE +400 bps 138 tps Customary fo ansactons of hie nature, which wil include Aimatve, Negabve ang Finer Bri Covenants, epreseniabons an Waren, Cnalions Precadert wo losng, Condens Precedent io Sawdon, Maret Flex (mag, fee, cuore o srucie and MAC Clause ‘among oes Nw Yoox Law ‘Syndication Support Statement ‘See AppendiI for Syndication Support Statement executed by Monica Macia, Head of Loan Syndictions, WTERKAL-7 Company Overview Founded nearly 40 years ago, Grupo S-Mart the sh largest grocery rear in Mexico and one ofthe leading syocer retain he Noche repen of Meio, wit a stong presence key cts along the US borer. As Cf March 201, te Compa hada toll of 6 suprmarel (36 ouned) wth over 12.400 employes. Grupo S- art asa sine value propostion fic eeusesonennancngcunlomer experience tough super Quay, guaranteed freshness, broad assorment vary, 24-hour sev effet box tes and convenient and 2ppeaing yours Value Proposition and Product Offering ‘Grupo S-mart's value proposition i focused on quality products at ow pices which appeals o all ‘00)0economic levels ofthe Mexican population. The value proposition isthe main criverof sore raf with the target market comprised of familes, inclnaton towards women who usually contlpurcrase decisions forthe cet famiy and income-earning consumers everlycistrbuted within age groups. The food court experiences Sonifcant afc during lunch hous and offers the best value propositon i the stores’ respective areas. The ‘a¥erage ticket size in 2014 was approximately Ps. 160 wih over 108 milion cents recorded in 2014, ‘The Company is idealy postoned to continue to benef rom the size and expected grovth of the Mexican population ie. growing middle class, young average age, and increasing formal employment) Grupo S-Marts product offering is focused on Perishables and Edible Groceries for which customers recognize S-Mart or its quality, prce and sve. The Company aio offers groceries and, toa lesser extent general merchandise. Prepared foods, which are produced bya fuly-owmed and Itegrated conraized industial Kitchen operation, are offered in food court ‘treughout the day ‘The Delfoods segment isan integrated indus kitchen operation that ‘ons and operates two cenalzed industal Kitchen facies located inthe ‘Company's distribution centers in Cudad Juarez and Monterrey. The food legis, preparation and serving practices ae geared towards maintaining tte freshest and most savory products for cents. In 2014, Delfoods contibuted 0.3% to Grupo S-Mart's Group EBITDA margin of 8.2% ‘Grupo S-Marts brand porolo includes boh owned and exclusive right brands wth the Smart private label ‘sanding as the largest contributor to sales among private brands. The development of prvate label bands has ben an important component ofthe Company's strategy. acing asa dferentiator vs. competitor products. The ‘Company sels over 600 products under its private label portfolio of which most private label purchases are done trough Larroc and are requested by the Company's procurement department (no invenery risk on behalf of aro), INTERNAL-8 Larrocis an interated and centralized procurement operation inthe US handling a8 foreign goods purchases. ‘merchandise and equipmert. The business is a leading procurement cooperative wih aver 60 members which lows the Company to negotiate beter terms with supple, In 2014, Lavoe contrbuted 0.4% to Grupo S-Mart's (Group EBITDA margin of 8.2%. “The Company's stores are serve through a state ofthe at efficient distitution and logistics operation with capabilies to withstand the Company's expansion wth minal ivestmert.The Company has 3 state-of-the-art distrbuton centers in Ciudad Juarez, Monterey and Chinuahue with delveries of merehandiee from dstributon ‘centers to stores made through Taurus, a wholly-owned and integrated ransporaton company, Taurus ‘current nasa feet of 122 fll-owned GPS-equipped tucks and 311 tales, of which approxmately 85% are refigerated. The business ensures efficient logistics and on tp delivery fox Grupo S-ar. ie we 8 Ceupa$ar ures ao ees Roclaex ich pene oa naan ed en dca Sipurvrten, davouton cto ere elev! art Cottnds naiNs,Focconeconebued oN Gupo Saf Gen E5oRrorpnoto a ‘The Company's integrated supply cain is but around a rapd and efit response to market tends and is supported by the aforementioned value-adding Independent businesses. Real Estate Portfolio Summary Grupo S-mart's Real Estate porto (across owned and leased properties) is comprise of 66 stores, 16 sp ‘mals, 3 distribution centers, 2 cross-docking facts and other facies managed traugh the Group's real estate subsidiaries: PIM, IDM and DCO, ‘Supermarkets Profile ST Sc TS 2014 Merc’ Mahe Share by Bot Supurmaret Sloves___Seoyiphie Foot INTERNAL: 10 Industry Overview Industry Benchmarking Analysis. ITERNAL= 1 Historical Financial Analysis: ‘Anaiysis based on Confidential Information Memorandum. Figures assumed in millon of US dollars, except ‘othermse noted. Refer tothe eppends o see figures in Mexican pesos. xchange Rate ows 201 os a ‘Saar aa aaa oe ae) 1308 Pat. ler aron eee Revenue: Grupo $-Mart revenue increased 3.7% In 2014 reaching net sales of USS1,206m compared to 2013 net sales of USS1,163m. Given the defense nature ofthe business, the Company Fas had no significant Siowdowns in terms of sales growth during the past years even when Mexico has experienced extemal Ssreseful stuatone: economic depression du to the 2008-2008 global fancal eis an secur crisis mosty Inthe countrys Nore region in 2010-2011. Leasing income averaged 0.5% of oa revenue ove pied. Gross Proft: Grupo §-Mart gross profit increased USS12m in 2014 to USS316m compared to 2013 gross profit of US$304m. Given Company's centrakzed and concentrated purchasing power inthe region, ehinkage management and value-adding operations cross the supply chain increases margins (Latrec, ‘Delfoods, ‘Taurus, Reccamex), the Company has achieved fo maintain ross margins at levels that range Between 72 5% to 76.0%. SG&A: Grupo S-Mart expenses increased US$t2m in 2014 to US$240m compared to 2013 SGBA of UUsé2z7m. SGBA comprised 19.9% of sles in 2014 and 19.6% in 2013, an increase of 3 bass pons. Payroll Contibuted ~£3% of the total SGAA, other expenses such as advertising and astrbuton contributed ~23% of the Company's total expenses. Rent payments which represent ~4% of otal SGBA is associated fo 20 stores ‘where both the land ané consructon are leased and 10 sores where only the land is leased and contruction is owned, EBITDA: Grupo $-Mart EBITDA Increased USS4m in 2014 to USS1#Im compared to 2013 EBITDA of, USE107m. EBITDA margins have varied from 8.8 to 9.9% inthe past 8 years, with a sustained average margin of 3.2%. High margins have boon sustained over the years due to song procurement and the addonal Profablty achieved through ts complementary business uns, Balance Sheer INTERNAL 12 acl Yor Ended Dreamer latance Se ie a ma Ea cash ‘7 sor $7 x we ‘cau Festa 3 3 5 ‘ . ‘eny ” o * 2 s ter Soest ae 2 a 3 3, ‘ots Curren Aveate me wr er 2 a oper Prt Eure 2 "250 mn = = Total LT aeate a ss oe Totlaasee, Ss Aono Foi 2 = = ro ‘os Ce Cen sete oo 2 m ° 3 ‘otal Curer:Lisiiies Fas wit Fa wir Fa Gow . 4 3 ° ‘Soon 5 2 os 2 ce ‘Total Lisbiios 3 3 [a cs we otal Libis 3s Her Hr 2 Be uty ‘Starch suty 209 ss 75 en 8 Non conate mes 2 2 2 2 2 Totaleauny or ie ar 9 Cas: Grp Mar has cath ranged between USEI7Em and USS26m over the pat yer The Company has signfcart cash flow generation capable to increase cash to historeal evels of ~USS16Om (2013 and 2014 cash of USS26m and US$4Bm, respectively). Inventories: Grupo S-Mart inventory management policies have allowed it to maintain high turnover and low lovels of shrinkage (2013 and 2014 Inventories of USSE2m and USSEEm, reepectivey. To crease. tumover and mprove inventory management, store managers have the flexibility and detson making abies to adapt the arders to respond to market conditons (demand peaks, weather, etc). Delivery orders to each store from te Company's dstibuton centers are based’ on en automatically generated. suggested replenishment ist Company Inventories are dhided ae folows: groceries (~58%), pershabes 122%), general ‘merchandise (-17%) and other (3). PPAE: Over the past yoars Grupo SMart has had an average capox a8 percentage of revenue of 3.6% (2014 PPE of US$z84m). In 2010 the Company incutred a slowsown of ther investments ven a secutiy {sis in Norther regions of Mexico, decreasing their capex as percentage of revenue 10 2.8%. In 2014, the apex was marly composed of new stores (~73% new stores, ~12% in store remode! actly and 8% in ‘Sstiouton centers expansion), Liquidity Profile: Historically the Company has operated with close to no debt. Gnipo S-Mart has significant roam to expand leverage whie maintaining acceptable rai The Company has @ total debt of USstam, a8 of 2014 Equity: Due tothe reform effects, the Company decided to pay a dividend to its shareholders in 2013 of U88205m, re Company di not incur new deb forthe dividend payment Investment Highlights ‘Strong Market Fundamentals + Mexico is asa hight atractive martin the region, mostly due tits relevant size, healthy {undamentals and politcal stabity ‘+ Mesico is expected to outperorm other Latam and EM economies on the back of sll macroeconomic undamentas and postive stuctural reforms ‘+ Favoreble demographic fundamentals evidenced bya large, young, and api rowing population with ‘an expanding midi class and growing working family-forming age groups Leading Postion with Strong Brand Awareness ‘+ Grupo S-Marts current area of infuence (Chihuahua, Nuevo Leon and Tamaulipas states) displays one ofthe strongest economic prospects in all Mexico Northern Mexico has been exhibiting high growth and high per capita income relative to other Diereted Curtomer-Conte Business Mal "ine Companys crtome reed buses phioscpy has led iohigh ccstrce ant recogton of the Sita band Novem xo Brand porte ncudes teh owed and exerts rane Prat be! conBuono Grou venue Ras eached lvl of~14 fl revenue + Prose porto es sane allcsoecoram segments ough aed olen sourced cay and es + Oftre24-ur servic nat stores ‘Key Competitive Advantage Derived from Highly Integrated Supply Chain ‘+ Semartis able to achieve a strong produc offering and higher margin from te value-adcing ‘complementary businesses Larroc: in-house procurement of fore goods Deifocds: centralizes kitchen facies Taurus: airy delvery, cross-border certfeation Recclamex:revenue-generating operation + Has ~2,870,000 tof cistibuton center space and a capacty to supply 20 adaitonal stores with ts current citibuton infrastructure ‘Track Record of Growth and Sustainable Margins ‘+ The Group's Same Store Sales (SSS) growth has stood at an average of 3.5% ove the 2007-2014 etod, versus an incusty average of 2.8% ‘+ The Group has outperformed th industry in Total Stores (TS) growth, in the past’3 years, having grown at an average growth ate of 8.4% compared to the industry's 6.8% ‘+ Grupo S-Mart's EBITDA margins nave varied ftom 8 8% to 8 9% during the past 5 years, witha sustained average margin of 8 2% which compares favorably wit the industry's average a 8.0% Highly Motivated Worktorse Led by Experlenced Management Tear "= Highty experienced management team witha stong philosophy of KPI racking = CECAP: in-house traning and certfcation center for al personal (eg. stores, vers) * Ranked tial greatest place to work in Mexico in 2018, * Socal actives for employees and community INTERNAL 16 Risks and Mitigants Risk: The Company may not be abe to sal Real Estate Portfolio and repay Big to Asset Sale + Mligat The Company pans io run a public sale proces forthe Real Estat atsts whi 612 months of the vansocion closing Plnigrupo, wich e owned by Southem Cross, nas expressed resin fe asset ‘and has been advising Southern Cross’ Prvate Equity team nvalig an assessing the assets Oe ‘agers coudinude a sategic 0 @ Mexean REIT. REIT veces In Mexico have hada sucess ito ‘Se heir enrace ifthe Mexican market in 201 (REITs ised -USS2b Inthe Mesican market | 2014), Fibra Uno (argest REIT n Mex) haa -USS1 Sbn of eset under management fo azure new properties and could be a polenta bidder. REITs have been acqurers of sini portos and they have Eppete to continue ding 0. + Aeionaty te Financial Sporsos are considering including a mininum ThirdPary valuation asa Condon precedente closing the ransacton ging HSBC further como ints abit o sale an va of the Real Esa porto, ‘+ Adtonly, we have una base case and downside case scenaro assuming te Compan srt abe to sel the Real state assets win the Bige Loan Facts ten: The Compan generals enon ee cach fow to susan the mandalary prepayment schedle of he debt toancng fr Wo year ter ose, We ‘af igh confient athe Company woul be abeto sel some, of ofthe Real Estat ase thn ‘wo yaar fo mest hess repayment bigaons [lsk: Despite its size and market share, Grupo S-Mart will compete directly with larger, more ‘ographically diverse compelilors such ww WalMart and Soran += Mitgant Most of Mexico's population lives in what would be considered small cties (ess than 250,000 innabtants) which tends to favor reals with smalie-box sizes, ike S-Mar, that can profablyaack these smal, underpenerated markets. Proximity, convenience / customer service and pricing are trea main factors shaping the modern grocery landscape in Mexico and Latin America ‘+ SMart benef from its sigaieant presence in key realestate locations, chent-cantic model and dferentated business model (ie. focus on perishables, ecient uniform box sizes and layouts) ‘The Company's highly integrated supply chain is designed to respond quickly tomarket tends and allows Products o be soldat lower price points while retaining proftablly ‘+ Slat is one of the most recognized brands inthe states where it operates, placed second in “Top of Mind” rankings Risk: Capacity/ Retention of key management ‘+ Miigant: Tre Financia Sponsors nave nacate ty pian retain key management postions, tatogic Imanagemext decision makers will provide atvactv incentives to work along withthe Financial Sponsor to define S-Mar's growth path and remain involved in day-to-day operations, INTERNAL 15 Risk: Exportable/ Scalable business model to other regions ofthe Country ‘+ Mllgant Historically Grupo S-Mart has repicated ts business model in the Norther region of Meso. thas potential to replicate the formula and expand into regions outside its curent area of infuence withthe sare know-how they curently operate with. The Company has a special commit thats in charge of identifying ‘ites with the optimal conditions and capacity to hold this ype of supermarket as wel asthe evaluation of ‘competive landscape, location, canibalaton, and population characteristics. ‘+ There are US-border ces (Ciudad Cuauntémee, Torteon, Salle, Pedra Negras, et.) that have been ‘dentifd fr shor term expansion, Grupo S-Marts business mode! has easy expanded ito these cites through exsting infrastructure supporting high probabity tat this wil happen. [Blsk; Dependence of US consumers and Mexican peso exchange rate depreciation vs. the US dollar ‘+ Miigant Grupo S-Mart has al oftheir operations in Mexico (all ofits 66 stores, 16 strip mals and 3 istbuton centers are located within the northem region of Mexico). Mexico has experienced prolonged Betiods of economic crisis, caused by internal and extoral factors over wich the Company has no contol For example, during 404, the Mexican peso deprecated significant against the US dol, leading most companies into pice increases of imported products. Despite the challenging environment, Grupo S-Mart ‘margins remained relatwel sable and the Company managed to bain a growth rate of € Oi in sles compared to 2013 (aso average ticket remained constant) ‘+ Given that tne Company receives ~10% oftheir net sales in US dolla, the Group is partially hedged to US

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