Rallye/Casino - our tendering decision
All,
We have updated our Casino model here.
"What good is performance when you are not the beneficiary?" That must be one question on Naouri’s mind, along with: “How do I buy out more of my pesky bondholders?” and "Where do I actually find this performance in the end - away from France Retail that is?". We think we actually have some €1.5bn answers to the last question, but it is also the last to be answered. The first should probably be if Casino’s current weakness is tactical or if we are actually headed for a covenant breach and possibly for a Sauvegarde double-decker.
Covenant Issues:
- A primary motivation of Casino and Naouri is to prevent a covenant breach at Casino. Any covenant breach at Casino could cause the whole structure to collapse and destruction of value across the holdings could be disastrous.
- The obvious way to prevent covenant breach is an underlying improvement in EBITDA at the France level (excluding Green Yellow). However, with top-line sales at the Retail banners showing a 1.6% decline on a same-store basis, an improvement in EBITDA could be difficult to achieve.
- The main covenant of concern is the interest coverage covenant. The EBITDA headroom has declined from €199m on June 21 to €55m at year-end.
- There are some exceptional refinancing costs associated with the tapping of the Term Loan B in Q1 2021 which will roll off for the next quarterly covenant test, the levels remain tight. Headroom has declined from c.€200m in June 2021 to €55m at year-end.
- Despite this, we do not expect it will be breached in March 2022.
- Note, cash balances have been boosted by the recent closure of IFRS5 - Assets held for sale, namely Mercialys and Floa Bank. These have no impact on the interest coverage test but will improve cash balances. If the test was under severe pressure, we would have expected an earlier retirement of 2022 and 2023 Casino bonds. Adjusted segregated cash as of March 2022 is likely to cover 2022 and 2023 (note that the 2022 bonds have already been tendered).
The Conflict:
- Casino/Rallye/Naouri continues to believe passionately in 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.
- The easiest way to create value is to sell a non-core asset, however, so far, Casino appear unwilling to let go of any of them.
- Any realisation of assets above current valuations will boost the credit and equity story at Casino - but due to the high level of unsecured debt at Rallye, limited value flows to Euris/Naouri. To that end, the unsecured debt at Rallye needs to be taken out before realising any asset sale. Meanwhile it is near impossible to fund any facility to take out the Rallye unsecured.
Hidden value in LatAm:
- GPA has a market cap of only €1.3bn, but is made up of three parts that together amount to €2.8bn of value:
- The Brazilian Retail business; which on a pro-forma basis for the sale of the Hypermarket stores, has€3.2bn of sales and €280m of EBITDA. Conservatively, at 3.5x EBITDA multiple, implies €1bn of value.
- Exito, the non-Brazilian business, predominately Colombian, which has BRL24.3bn of sales and BRL2.2bn of EBITDA (8.8%) This business has a partial listing on the Colombian stock exchange and it trades at 0.38x sales or 4.2x LTM EBITDA. Conservatively, we have valued it at 3.5x, implying a €1.4bn valuation.
- 35% stake in Cnova - Cnova also has a partial listing and has an implied market capitalisation of €1.9bn, of which GPA owns 35%. Even using a crude 20% discount, this is worth c.€500m to GPA.
- Currently therefore GPA trades with a discount of €1.4bn. Hidden value of which 41% accrues to Casino - but it could take all.
How does Casino monetise the value?
- The easiest way is simply to do a share split at GPA, into its three constituent parts. This would be similar to the exercise done in September 2020, when GPA split Assai away from its then parent, GPA. However, this would only monetise Casino’s 41% of the hidden value.
- Alternatively, Casino could launch a tender for the free float of GPA, which would require an additional €700-800m of financing. This would be negative for the covenants (depending on which entity raised the debt) but would secure Casino 100% of GPA, 97% of Exito and c.99% of Cnova, making it considerably easier to subsequently divest any or all of these assets. The tender however would likely require a premium that could largely erase the benefits of unlocking all of the discount.
- The final option is for GPA to launch a €500m share buy-back (to which Casino do not participate) and then subsequently purchase Casino’s stakes in Cnova and Assai (for €500m and €1.5bn respectively) for GPA shares. This would involve Casino becoming a 90%+ shareholder in GPA for no cash outlay and allow it to substantially claim all of the discount.
- However, we caution on two fronts on realising the GPA discount. First, none of the three approaches improves the covenant situation at Casino France. And second, worse still from Naouri’s perspective, all the value created by collapsing the apparent GPA discount is likely to accrue to Casino bondholders and shareholders and Rallye unsecured unless the Rallye unsecured have been previously taken out.
Investment Considerations Casino:
- We are not tendering our unsecured bonds today as we do not see Naouri at the end of his game. We had previously toyed with the idea of taking a long position in Casino equity on the expectation that footfall return to the Paris region, driving a recovery in top-line sales and therefore France's Earnings. This scenario has moved into the distance, in turn providing Casino's owner with a window to buy back certain instruments at low prices, Rallye bonds being among them.
- Our base case remains that Casino does not sell any major asset over the next 12 months, however with covenant headroom diminishing, a major sale seems required to deleverage Casino. We expect Naouri to hold on to his options for as long as he can.
- We see Casino's LatAm holdings as a source of €1.5bn of value that is currently not recognised in the market. However, realising this value will not resolve the impasse at Rallye without first addressing the bonds there. We are pondering the options available at current discounts, given the structure and lack of assets besides the Casino shares.
- Downside could come in the short term from a covenant breach at Casino.
- We are cautious about taking a position in the Casino bonds, as it is not inconceivable that Naouri/Casino would seek Sauveguarde protection for Casino in case of a covenant breach. The process at Rallye has been favourable to his interest and a 10yr moratorium at Casino would maintain control for a further decade.
Tomás