Dollarama Inc. has signed a deal to buy a 50.1% stake in Latin American retailer Dollarcity, which operates stores in Colombia, Guatemala and El Salvador.
Under the deal, Montreal-based retailer said Tuesday the estimated purchase price was in a range from US$85 million to US$95 million based on financial projections provided by Dollarcity management.
Dollarama will make a US$40-million payment upon closing the deal--expected to happen in August--and settle the balance in the third quarter of its 2021 financial year.
"After six years of due diligence review and on-the-ground experience in Latin America, we believe that now is the right time to exercise our option to acquire this interest, and that Dollarcity is the right vehicle to capture the growth potential we see in our chosen markets," Neil Rossy, Dollarama's chief executive, said in a statement.
"We have full confidence in our local partners, who will continue to lead the Dollarcity business with our support."
Cannacord Genuity Corp. analyst Derek Dley said the deal gave Dollarama an additional long-term growth avenue in company showing strong sales.
"The transaction provides Dollarama entry into Latin America, where the company is seeing stronger sales per square foot than at its Canadian stores,'' Dley wrote in a report to clients.
RBC Capital Markets analyst Irene Nattel said in a note that the news was encouraging for Dollarama.
"Although the market had widely anticipated Dollarama would execute the Dollar City call option, terms are more favourable than anticipated."
Dollarama signed an agreement with Dollarcity in 2013 to share its business expertise and provide sourcing services.
The deal included the option for Dollarama to acquire a 50.1% interest in Dollarcity as of the beginning of the seventh year of the partnership.
The agreement was amended in 2016 to postpone the opening of the call option window from February 2019 to February 2020. However, Dollarama said the companies had decided to accelerate the process.
The Dollarcity board will include five directors including three Dollarama representatives and two representatives of the Dollarcity founding group.
Dollarcity operated a total of 180 stores at March 31 including 44 in El Salvador, 54 in Guatemala and 82 in Colombia. It plans to have 600 stores by 2029.