Fitch Affirms Distribucion y Servicios at 'BBB+'

Business Wire, May 14, 2004

Business Editors

NEW YORK--(BUSINESS WIRE)--May 14, 2004

Fitch Ratings has affirmed the 'BBB ' foreign and local currency senior unsecured ratings for Distribucion y Servicios D&S S.A. (D&S). Fitch Ratings has also affirmed its national scale rating of 'AA-(chl)'. The Rating Outlook is Stable.

The ratings are supported by the company's strong competitive position in the Chilean food retail industry, high operational efficiency and solid financial profile. D&S's large network of stores and ownership of key store sites provide strategic advantages by acting as entry barriers against competitors. The ratings' affirmation incorporates the assumption of completion of an upcoming SEC-registered capital increase of up to US$250 million. The transaction, which has received U.S. regulatory approval but is pending Chilean approval, is scheduled to be completed over the next several weeks. Proceeds will be used to repay bridge loans outstanding in connection with the December 2003 acquisition for US$125 million of 7 hypermarket-format stores owned and operated in Chile by the French retailer Carrefour. Proceeds will also be used to increase liquidity and to finance customer credit purchases under the company's credit card (Tarjeta Presto). As part of its long-term strategy, D&S is seeking to boost credit purchases to promote sales of non-food items. In 2003, credit sales accounted for 14% of total sales and the receivables portfolio in connection with credit purchases reached US$157 million at Dec. 31, 2003.

Fitch Ratings believes that the Carrefour acquisition is consistent with D&S's strategic focus of continued economies of scale gains in purchasing and distribution and their transfer to consumers to increase traffic and volumes. As part of such strategy, in July 2003 the company abandoned its traditional marketing strategy of changing promotional discounts in favor of a permanent low-price strategy. During the second half of 2003, the company also re-branded its store network (formerly under three different names) under the single brand Lider.

During 2003, revenues increased by 10%, driven by the incorporation of new selling space. Same-store sales, although flat for the year, recovered during the second half. Profitability, however, has weakened due to cost increases related to the implementation of the 'every day low prices' commercial strategy, the incorporation of the less-efficient Carrefour stores and the conversion expenses of those stores to the Lider format. The recovery of margins will be slow and gradual, as the company reaps the benefits from the implementation of the new pricing strategy and the less-profitable Carrefour stores are fully integrated into the more efficient D&S system.

Over the past several years, D&S has pursued an aggressive expansion strategy and has sought to broaden national coverage, increasing its selling space by an annual average growth rate of approximately 10%. Historically, capital expenditures have been financed with internal cash flows or moderate increases in debt. The Carrefour acquisition, however, was fully funded with debt. Increases in working capital in connection with the company's efforts to boost credit sales have also had an impact on total debt, which at March 31, 2004 reached US$555 million, up from US$355 million at Dec. 31, 2002.

Total debt is expected to decline in 2004 due to the repayment of bridge loans related to the Carrefour acquisition. Total debt should reach approximately US$450 million at Dec. 31, 2004. Together with anticipated growth in EBITDA from organic growth and the incorporation of the Carrefour stores, this should translate into an improvement in the interest coverage measured as EBITDAR/interest plus rents to around 5 times (x) from 4.3x in 2003 and in the Debt/EBITDAR ratio to 2.5x from 3.9x in 2003.

For 2004, D&S has announced capital expenditures of US$225 million, including the US$125 million Carrefour acquisition and US$100 million for the opening of 7 new stores and expansion of the distribution center. Fitch Ratings believes that the company will continue to pursue an aggressive growth strategy which may include further acquisitions of smaller regional chains in addition to new store openings, towards which goal the company continues to purchase land.

D&S is the largest supermarket operator in Chile, with revenues of US$2 billion in 2003. Carrefour had US$200 million in revenues during 2003. At March 31, 2004, the company operated a total of 75 stores in Chile, of which 47 were located in the Santiago metropolitan region. D&S's market share countrywide is approximately 33.5%. In the Santiago metropolitan region, its market share is more than 44%. D&S owns around 90% of its current selling space and has acquired the majority of sites targeted for new store development over the next few years. D&S operates three store formats, including: two hypermarket formats (Lider and Lider Vecino) and a supermarket format (Lider Express). The company also operates neighborhood malls.