Fixed Income : Attack on Casino : Right or wrong ?
18 October 2018
New consumption habits with a focus on local shopping and home deliveries have shaken up France’s traditional retail model. French retailers will have to evolve to survive, and at the same pace as the new shopping habits are taking hold. While most investors expect to see sector consolidation, the spectacular string of US/UK retail defaults has drawn greater attention to retailer indebtedness, as analysts look for the next company to falter.
The Rallye Group, which includes French retailer Casino and is known for its debt at every level plus financial complexity, has crystallised the market’s fears for the retail sector. Under pressure from short selling, as of 5 September Casino shares had lost 47% of their value since the start of the year. This is no longer about fears; this is a stock under attack. We now see Casino as undervalued, with a lower market cap than the estimated valuation of Monoprix.
Going back to the group’s structure: most group debt is held by Casino’s parent Rallye, which forces Casino to pay a large dividend each year so that Rallye can pay its debt interest. To obtain financing, Rallye lends Casino shares to banks. The more the Casino stock falls, the more shares Rallye has to pledge in exchange for this financing. The idea of the short sellers is to drive down the Casino share price as low as possible, in order to dry up Rallye’s financing and cause its default, so that Casino no longer has to service the debt of its parent. At this stage, one theory could be that Casino has come under attack in order to protect its future and enable it to make essential investments. But it is just a theory.
In practice, Jean-Charles Naouri, Casino’s CEO and main shareholder has been successfully running the group’s strategy for 26 years. Yes, the group is highly indebted, but we don’t see the situation as critical. To meet the new demand, ensure its supply conditions and secure its financing sources, the group has an array of options.
Outside the group’s traditional support from French banks, as shown by the credit line obtained by Rally this month with no collateral, we think it likely that Casino will get together with an online player such as Amazon or a traditional French retailer that would offer synergies and greater competitiveness. Similarly, to meet its cash requirements, the group also has property and other assets it could sell in the short and medium term, such as its stakes in Cdiscount, Monoprix or GPA in Latin America.
Casino is still a well-known company with various possible financing sources, which should enable it to secure its future and achieve a strategic transformation, while also being a good candidate for potential sector consolidation. Casino has also revealed that it held talks with Carrefour in September, and there are market rumours of discussions between Casino and Auchan, which we think would make more sense from a competitive standpoint.
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