Casino - No closing time, keep playing
All,
Please find our updated analysis here.
Trying to assess the next steps of Casino management often proves an impossible task, but with recent events, perhaps nothing is an option. Earlier this year the market had expected the February 2023 maturity on the secured Rallye debt plus the maintenance covenants on Casino’s RCF Facility would ensure Casino’s management remained focused on the disposals of their non-core assets. Casino's management point to the sale of €3.1bn of assets since 2018 as partial success of the plan to deleverage Casino. But further needs to be done. And with the (old) covenants tightening in September and December 2021, investors were rightly expecting further asset sales and this view was supported by the extensive marketing of Cnova over Summer 2021.
Alas, all has changed. First, the change in covenant calculations for the RCF banks, which canceled the original Gross Leverage covenant and changed to a Gross Secured Debt covenant, which has removed the time pressure for Casino to divest its assets. Secondly, the announcement in late October that Rallye has renegotiated the Sauvegarde agreement with the maturity of Secured bank debt at Rallye, extended to February 2025 from February 2023. This also removed the time pressure for Casino to divest its non-core assets in the short/medium term.
Therefore, with no time pressure, Casino/Rallye are likely to hold onto all of their main assets, hoping to extract a higher valuation in the future than current expectations.
Impact on Casino instruments:
- Overall, the lack of time pressure on selling non-core assets means Casino is lumbered with higher interest charges (from higher debt levels) for another couple of years, and this has pushed the Casino credit curve wider.
- Conversely, the perps and the equity should benefit if investors believe that the various non-core assets (LATAM/GreenYellow) are likely to grow faster than a traditional bricks and mortar retailer. However, both perps and equity has declined in value over the last 6 months, mainly due to the reduction in valuation of Cnova. The reduction of value of Cnova is two-fold. Disappointing sales and EBITDA numbers from Cnova due to investment in prices is part of the explanation, but probably more important is the cancellation of a primary, and potentially secondary IPO, of the stock which has underwhelmed the market. (Additionally, there is a theoretical conglomerate discount that had the potential to tighten has likely widened again as the prospect of non-core asset sales diminishes.)
Base Case:
- Our base case has now changed to limited asset sales in the next 12 months. There is no time pressure for asset sales and therefore we can’t see Casino/Rallye volunteering to sell assets.
Toyshop play:
- Ultimately, Naouri (via Rallye) is a child in a toyshop. He can’t afford some/any of the toys he is playing with, but despite his parents (creditors) protests he continues to play. Creditors wants him to sell down non-core assets and deleverage. Creditors were expecting the toyshop to close in February 2023, with the hard deadline of Secured bank debt at Rallye forcing his hand. However, the shopkeeper, the Sauveguard court, have extended the opening time for a further two years and creditors and shareholders have to sit and wait.
- Casino/Rallye will argue the positives of being given more time. Management point to the sale of the Floa bank stake earlier this year and the positive outcome achieved by waiting before selling the business. Floa bank was valued by analysts at c. €100m in FY19/20 era but the Casino argument is, that by waiting and selling the asset this year, they have achieved a higher price of c.€180m plus an earn-out partaking in the upside of any growth BNP achieves with the entity. Management’s argument points out that this has come at the low opportunity cost of c. €10m (2yrs of interest on the original €100m valuation). However, it was extremely difficult to value the Floa stake in FY19/20 given the lack of disclosure from the Company on the asset.
- But despite any rationale dissenting view to holding onto the asset, the point of the story is to highlight the motive of Casino and Rallye in relation to its debt and shareholders. They will continue to play with their toys until the end.
So where next?:
- Casino/Rallye continues to believe passionately about all its various ventures and the growth opportunities they potentially have. The story is the same for all assets - GPA, Assai, GreenYellow, Cnova, RelevanC, Real Estate assets, and other smaller assets. The problem is some of these assets need cash to continue on their growth paths.
Latam:
- Recent transactions in LATAM where Assai purchased the Hypermarket stores from GPA has provided additional funding to GPA to fund their expansion and refurbishment plans. In Casino’s defense, neither the GPA nor Assai are in need of cash to fund their expansion plans. But because of their expansion plans and the lack of deadline at Rallye we are changing our view that Casino will divest GPA or Assai in the short-term.
- Assai have plans to grow from R$40bn revenue company to R$100m revenue company by FY24 (R$25bn of the increase in sales to come from converting the acquired Hypermarket stores to cash and carry format.
- GPA also has ambitious growth plans and with the proceeds of the sale (R$5.1bn) have the available funds to attempt it.
- However, with the growth opportunities, it is difficult to see Casino exiting anytime soon.
Cnova:
- What is time-critical is the cash need at Cnova. After the significant effort during the summer trying to do a primary listing of Cnova, Cnova/Casino abandoned the plans. They might return to the listing but one of the primary reasons for the listing was to raise additional capital at Cnova to fund its expansion. Despite management reassurances that it isn’t time-critical, we fully expect the €300m of capital to be raised in the next 12 months either via private placement, a listing at a lower price, and/or cash injection from Casino. An advantage of a cash injection is the potential to dilute CPA’s stake.
- Again, the reluctance to give up a small portion of value by doing a listing at what Casino view a sub-optimal value highlights the reluctance to stop playing in the toyshop. Given the reported growth opportunities, the growth from the additional capital should outweigh the suboptimal price achieved for any listing.
GreenYellow:
- Given the removal of GreenYellow from the covenant calculations for the RCF and senior facilities, we fully expect GreenYellow’s expansion plans to be debt-funded. GreenYellow are seeking to spend €1.9bn in total between FY22 and FY25 (gross - Casino own 74%). This will probably be funded with project debt which is likely to be non-recourse. Casino are to revert to confirm if the Restricted Payments test (Dividends) Consolidated Leverage Ratio, (which includes GreenYellow), includes or excludes non-recourse debt.
Underlying performance:
- Casino only release quarterly sales figures and aggregated EBITDA at Q1 and Q3, leaving it difficult to gauge direction of the business.
- French Retail & CDiscount Combined: From various snippets of information we can show that EBITDA has declined to €1,462m LTM. This is a decline of €21m from June and €12m from Dec20. This is primarily driven by top-line decline with EBITDA margins showing improvement.
- GreenYellow: Again, another business in modest decline. LTM EBITDA is €42m, down from €51m in June and €57m in Dec 20. The Company are still guiding to a c.€50m EBITDA for FY21, but these figures are not consistent with valuations of 20x+ showing excessive growth possibilities. Note: these figures are Consolidated EBITDA numbers, with actual Company level EBITDA reported higher. Casino are consolidating 100% of GY, versus a 74% ownership
- Property: Property division reported €64m for FY20 and €63m for LTM June 21. However, in Q3 it declined €46m as the sale of Mercialys stakes that took place in Q3 20 rolls off.
Covenants:
- Casino’s RCF banks amended the covenant calculations in July 2021 on which the RCF’s availability is based on. The new covenant is now a static 3.5x level for Gross Secured Debt/EBITDA at France level, excluding GreenYellow, less lease payments.
- It should be noted, however, that the old covenants, arranged in November 2019, would have been breached at the last quarter. This covenant was only going to be met with further asset sales reducing Gross Leverage. To revert to our Toystore analogy, the RCF banks had the means to force the closure of the store and ensure some of the toys were left behind (force Casino/Rallye to sell non-core assets). By agreeing to a new covenant calculation, the RCF banks have again extended the store opening times.
Potential transaction:
- Although our base case is Casino don’t sell any assets in the next 12 months, there is always the potential to drive value from the LATAM assets, namely the GPA asset. We have explored the possibility of Casino acquiring GPA’s 34% Cnova stake in order to a) simplify the GPA entity b) collapse the significant discount GPA trades at and c) enable Casino to hold c.100% of Cnova on its own balance sheet. However, given that Casino already fully consolidates Cnova on its accounts and already include it for covenant purposes, the drive may not be there. Both the desire to simplify GPA entity and remove the discount is likely to remain a focus of Casino, it is near impossible to gauge the timing of such a transaction.
- Casino’s LATAM stake had grown from €1.1bn in September 2020, prior to the announcement of splitting the GPA and Assai businesses to €2.3bn in June 2021. However, the value has retreated currently €1.8bn, primarily due to the GPA’s stake in Cnova (valued at quoted Cnova share price) falling by €380m. Casino are likely to focus on extracting the Cnova business from GPA at an advantageous valuation to Casino shareholders.
Positioning:
- GPA equity appears the significant outlier in relation to valuation multiples given its Cnova stake. However, sitting in Europe and our primary debt focus, it is hard to justify equity exposure in the name. Away from GPA, we are not overly excited by Casino bonds, where we see limited near-term catalysts and conversely, due to lack of motivation of selling assets, credit curve has the potential to widen further.
- We are maintaining our small position in the subordinate bonds in Rallye. At current share price, the secured Rallye loans are not fully covered (c.80% covered) leaving the subs trading on option value only. But the sub bonds at Rallye are the main barrier between Naouri and Casino equity value, and we still expect him to return to try another sub-par tender. The previous one earlier this year only used €46m of the €82m of available funds. For that reason, we continue to hold our small sub bond position.
Happy to discuss.
Tomás
T: +44 20 3744 7009
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