June 19, 2018 / 8:43 AM / 4 months ago

UPDATE 3-Ceconomy nears Russia deal, considers capital increase

* Ceconomy in very advanced talks with Safmar Group

* Considers a share capital increase of up to 10 percent

* Ceconomy shares drop nearly more than 10 percent (Adds Ceconomy confirmation)

By Alexander Hübner, Arno Schuetze and Matthias Inverardi

FRANKFURT/DUESSELDORF, June 19 (Reuters) - German consumer electronics group Ceconomy said on Tuesday it expects to strike a deal shortly to sell its loss-making Russian business to Russia’s Safmar group, and take a 15 percent stake in Safmar’s M.video.

Ceconomy, which owns retail chain Media-Saturn and which hopes to improve its performance in Russia through exposure to fast-growing consumer goods retailer M.video, is considering a capital increase to finance the transaction and bolster its balance sheet, it said, confirming a Reuters report.

Safmar is controlled by the family of oil-to-real estate tycoon Mikhail Gutseriev.

“Ceconomy considers carrying out a share capital increase of up to 10 percent,” the company said, adding that the capital hike would occur out of existing authorized share capital under exclusion of existing shareholders’ subscription rights.

Ceconomy had a market capitalisation of roughly 2.8 billion at Monday’s close.

Its shares were down 10.3 percent at 7.76 euros by 1033 GMT.

Ceconomy emerged last year from a split from Metro, which is now a food-focused retailer. Ceconomy retains a 10 percent stake in Metro, which has lost a third of its value this year as its Russia business has weighed on earnings.

The Kellerhals family, which holds a minority stake in Media-Saturn and has been at odds with the management of Ceconomy and Metro, has so far refused to sign off on profit transfers from Media-Saturn to Ceconomy, which has limited its access to cash to pay for the Russia deal.

Russia’s top two electrical goods and home appliances retailers — M.video and Eldorado — are preparing to merge, and Ceconomy said in January it was seeking a “strategic answer” to its poorly performing Russian business by the end of 2018. Both M.video and Eldorado are majority-owned by Safmar.

If deal talks — which Ceconomy said were very advanced - are concluded, Media-Saturn would pay about 258 million euros ($299 mln) for the M.video stake based on current exchange rates, although that could be cut depending on financial performance, Ceconomy had said in a statement earlier this month.

It had said that the transaction would entirely eliminate the operational losses of Media-Saturn’s Russian business, but have a one-time hit to Ceconomy’s net profit for the 2017/18 financial year of more than 100 million euros.

In April, Reuters was first to report that Media-Saturn was in talks with M.video about disposing of its Russian business.

Ceconomy’s sales in Russia fell by 7 percent to 526 million euros in the 2016/17 financial year as it closed five stores to bring the total to 57. It said in May sales continued to decline in the first half of the 2017/18 fiscal year.

The Russian retail market has been recovering from a slump, supported by falling interest rates and slowing inflation, and M.video’s sales grew 8.2 percent to 234 billion roubles ($3.65 billion) in 2017 when it opened 27 new stores. ($1 = 0.8639 euros) ($1 = 64.1075 roubles) (Editing by Maria Sheahan and Alexandra Hudson)

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