Kesko Corporation, the big and successful licensee of Intersport International Corp. in Finland, has signed an agreement to acquire a controlling stake of 80 percent in a new joint venture that will manage and develop the Intersport banner in Russia. The present Russian licensee of Intersport, Melovest, will own the balance of the shares.

Officials involved in the negotiations, which took more than seven months, indicated that the major elements of the transaction have been agreed upon, including the transfer of Intersport's licensing rights to the new joint venture. The ultimate purchase price will depend on the final number of stores being taken over by the new company. The latter will buy only the assets of Intersport Russia and the goodwill.

Like many other retailers, Intersport Russia suffered severely in the last two years from the economic recession, compounded by a decline of more than 30 percent in the value of the ruble. It closed down several stores. Furthermore, Adidas cut off its sales to Intersport Russia last summer, as it also did with the largest sporting goods retailer in Russia, Sportmaster.

The contract with Kesko covers all the 36 remaining stores directly managed by Intersport Russia, including the former 10 Russian stores of Sportland International, the big Baltic sports retailer based in Tallinn, which were taken over by Melovest a couple of years ago, coinciding with its management buyout in 2009. They will be renamed Intersport. The new company will also review Intersport Russia's franchising agreement with about 30 retailers in various parts of the country.

Through a management buyout, Melovest acquired the Russian Intersport license in 2009 from Hemslade Trading, a company connected with Delta Sport, former distributor of Nike in Russia and other CIS countries. After starting up Intersport Russia in 2004, Hemslade was projecting up to 300 owned and franchised stores in the country, but it never reached that goal. For its part, Nike took over the distribution in Russia, and Delta continued to be involved in the Nike business in Serbia and other CIS countrie s.

The new Intersport company controlled by Kesko in Russia will have nothing to do with Delta Sport and will not be involved in the wholesale trade. The 36 directly managed stores being taken over by the new company occupy excellent locations, mostly in the St. Petersburg and Moscow areas. The new owners have pledged to at least double their number over the next five years, expanding to other parts of the country with the help of Melovest, which is strong in real estate. The turnover of the 36 Russian stores was not disclosed, but Intersport Russia claims a share of 10 percent in the Russian sporting goods market – or probably only the organized part of it.

The takeover is meant to reinforce Intersport's position in Russia as a major alternative to the dominant sporting goods retailer in the country, Sportmaster; to Décathlon; and to the mono-brand stores of Adidas, Reebok, Nike and other major sports brands. Sportmaster sells a high level of private-label products and has exclusive deals with some important sports brands including Adidas. It also acts as a wholesaler, in contrast with Intersport.

Intersport will position itself in the challenging Russian market as an expert authority in multiple sports categories, and the major part of the assortment will be covered by products supplied by the most important sports brands. Its selection of private-label items should ultimately represent 20 to 25 percent of its sales.

Intersport will benefit in Russia from the financial power of Kesko, which has almost €1 billion in disposable funds with total annual sales of nearly €9 billion in 2010, and from its excellent relations with the sports brands in Finland, where it has a market share estimated by the company at 34 percent through its Intersport, Kesport and Budget Sport stores. Altogether, Kesko's sporting goods retail operations generated a turnover of €262 million last year.

Kesko is the company that first launched Intersport's lower-priced Budget Sport retail concept. Officials of Intersport would not comment on its possible introduction in Russia, where Décathlon is a major player in the lower price segment.

They also would not comment on Kesko's possible entry into the Baltic market. The issue has been under discussion in the past, considering the fact that Kesko operates supermarkets and other types of retail stores in the region, but it seems that Russia is now the priority in sports retailing for the Finnish giant.

As we reported on March 29 (Issue 22, No. 14+15 of SGI Europe), Kesko has made the strategic decision to explore new development opportunities in Russia. On April 4, it said that its Kesko Food division is planning to invest €300 million through 2015 to build up a chain of supermarkets in Russia, while looking at possible acquisitions in St. Petersburg and Moscow. A similar amount is going to be spent to open 10 new K-Rauta home improvement stores in Russia, in addition to the 13 stores that Kesko already operates in the country. These projects will help Kesko to develop synergies in logistics and other back-office functions that could benefit Intersport as well.

The deal with Kesko for the Russian market is an important piece of Intersport's strategy in Eastern Europe. The move can be compared with the entry of Intersport Deutschland into the Polish market in 2005 with its acquisition of a 25 percent stake in the former Maks Sport chain, which now consists of 30 stores, as well as the more recent acquisition of Intersport Turkey by Fourlis, the successful Intersport licensee for Greece, Romania, Bulgaria and Cyprus. Most of the other countries in Eastern Europe are covered by two other important partners of Intersport International – Intersport Austria and Mercator. In total, Intersport now has around 340 stores operating in Eastern Europe, more than any other sports retailer. Most of them have a surface between 1,000 and 1,500 square meters and are owned by these five licensees.

Meanwhile, Kesko has just opened a large Intersport store of 2,250 square meters in downtown Helsinki, based on Intersport International's new store concept and very similar to the new format recently inaugurated by Intersport Sverige in Stockholm. According to the same new guidelines Intersport Finland plans to open or renovate five more stores before the end of this year, mainly in the Helsinki and Tampere areas, and 10 to 15 more each year in 2012 and 2013.

Kesko has reported a 7.4 percent increase in total revenues to €2.1 billion for the first quarter of this year, driven by its food retail operations. The home and specialty goods division, to which Intersport belongs, had a 7.5 percent decrease, largely due to the shutdown of two Anttila department stores. The group's quarterly pre-tax profit rose to €36.1 million from €21.9 million in the same period a year ago.