Dollarama Inc. (DOL.TO) is exercising an option to buy a majority stake in Latin American retailer Dollarcity, expanding a relationship that’s been in place since 2013.

Under the terms of the arrangement disclosed Tuesday morning, Dollarama will make a US$40-million upfront payment, with the total purchase price rising to as much as US$95 million in the third quarter of Dollarama’s 2021 fiscal year.

Dollarama initially struck an agreement in 2013 to share its expertise behind the scenes with Dollarcity, which had 180 stores across El Salvador, Guatemala and Colombia as of the end of March, and is aiming to have up 600 stores by 2029.

"Dollarama is establishing a compelling second growth platform, in complement to our Canadian growth strategy," said Dollarama President and Chief Executive Officer Neil Rossy in a press release.

"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,” Rossy added. “We have full confidence in our local partners, who will continue to lead the Dollarcity business with our support."

Dollarama said its investment in Dollarcity will be immediately accretive to earnings, and expects the transaction to close next month.

“We view this transaction and the associated growth prospects as a material positive to the outlook for [Dollarama’s] stock,” wrote Edward Kelly, an analyst at Wells Fargo Securities, in a report to clients. Kelly has an Outperform recommendation and $60 price target on Dollarama.

“While international expansions in retail are notoriously difficult, [Dollarama] has completed a six year-plus due diligence process and was instrumental in shaping Dollarcity’s growth strategy, operating model, management team, and culture, which should all dramatically reduce downside risk,” Kelly added.