Casino - you don't need money to buy friends
All,
We will update our model over the day, but our initial thoughts are despite three announcements this week are that we are all still left with more questions than answers. Casino are proposing the transfer of assets into a new entity, but they haven’t clarified what debt will be transferring along with the assets. We fully expect that the term loans and RCF will travel with the assets, but it is possible that the Quantim bonds stay at CGP with the new merged entity only paying the rent across. The fate of the bonds is unknown.
Investment Rationale:
- For now, we are happy to maintain our 5% short in the 2024 bonds. We acknowledge there is risk to this position, with Casino outlining further asset sales - mainly a further stake in Assai. However, how these proceeds are used is still debatable and in order to drive value at Rallye, Naouri will have to explore more drastic options - notably including a Sauvegarde at CGP. To that end, we are particularly interested in quantifying the number of employees that would remain at CGP post-transfer of the retail assets to a new merged entity, as having less than 150 employees opens up further legal options to restructuring its debt.
Proposed Merger:
- In line with the speculation in various press reports, TERACT and Casino Group have signed an exclusive agreement to create a new retail entity. There is going to be two parts to this new entity, the first, which is likely to be controlled by Casino, will bring all Casino’s French retail assets, including its 9,100 stores with Teract providing its expertise in the operations of garden centres and pet retail and food distribution. The second part, to be named TERACT Ferme France, and controlled by InVivo, will be in charge of supplying local agricultural products via short food supply chain.
- The merger would value the activities contributed by Csino Group at 85% and TERACTR at 15% on a debt-free cash-free basis. The key word here is debt-free with no clarification on whether Casino France will transfer some and/or all of its bank debt across to the new entity.
- Secondly, in order to execute the plan, the new entity would require additional €500m of equity, and Casino and TERACT shareholders have already commenced discussions with potential new investors who are interested in becoming shareholders in the new entity. Because we do not have the capital structure of the new merged entity, we do not know how dilutive that €500m cash raise will be.
- We have been assuming that all the bank debt travels along - on the condition that it be paid down by the proceeds. In fact, banks may chose to leave €500m at CGP, but secured over an intercompany loan to the merged entity which would be first in line for a pay-down.
Full Year 2022 Results:
- We already have had full-year results but it is worth pointing out that overall sales was flat (up 0.9%) versus 2021, despite opening an additional 919 stores and despite inflation. The sales numbers highlight the importance of the Convenience segment, with same-store sales up 6.6% and Casino opening a further 652 new stores in this format. However, the flip side of this is that the other formats all underperformed. Franprix did manage 3.4% increase on a same-store basis, but Monoprix only managed only 1.2% on same-store Basis, despite renewed momentum in the Paris region.
- Hypermarkets and Supermarkets both recorded same store declines (-0.1% and -0.4% respectively) but comparing this against an overall growth in Q1-Q3 of 1.7%, leads to a very disappointing Q4 for both formats.
- Moving onto EBITDA and Trading Profit, the figures continue to disappoint. French Retail banners' EBITDA declined to €721m in H2, and 1.199m for FY22. At the Trading Profit level, H2 margins have declined by 40bps to 4.7% versus 5.1% in prior year.
- Casino have disclosed the trading profit of the individual banners, which I haven’t seen previously. This has enabled the Company to highlight that Monoprix/Franprix and Convenience combined have increased trading profit in H2 22 versus H2 21 by c.18%. The three combined equals €241m of the €335m trading profit recorded in H2 at French retail banners.
- But highlighting the positive also highlights the issues at Hyper- and Supermarkets, with trading profit reduced by €28m to mere €67m for H2 22.
Cashflow:
- Starting with EBITDA less lease payments, the French perimeter (which includes Cdiscount and Segisor, excludes GreenYellow) generated €686m, which is €86m less than in prior years.
- We however should include non-recurring items (store format changes, and some restructuring costs, which occur all the time!) and some other items (€27m outflow in relation to sale of Mericalys). Adjusting for these, cash generation was €272m, €154m less than in prior years.
- In addition, there are CAPEX and Working Capital changes to adjust for. Working Capital was a large €395m outflow, €220m of which is explained by the Company by way of increase in inventory at Hyper-and Supermarkets due to their poor performance in Q4 and strategic stockpiling. No explanation was offered for the balance, €175m of outflow. We speculate, but it is reasonable to assume that the reduction in credit insurance for suppliers is having an impact on payment terms that Casino receive. This would be a slippery slope.
- Overall, before interest and asset sales, Casino France's Free cashflow was €524m negative, €414m worse than prior years.
- We also understand from French retail publications that grocery trading in the new year has dropped off a cliff, extending the disappointing Q4 performance further. When adding to that the recent agreement across French grocers to hold prices constant for another quarter, we are increasingly concerned about bondholder value at CGP.
- Finally, without wishing to be sinister, we find it commendable that Teract are so brave to buy into this franchise on the basis of raising only €500m in fresh cash (if that cash is even supposed to stay on its books). If it were to stay, the cash could be used up in under a year at this rate. The concept of kitchen sinking comes to mind.
Asset Sales and debt repayment:
- Note that Casino has disposed €1.45bn of assets in FY22 but only reduced net debt by €339m! Disposal proceeds at Casino France totalled €972m, plus the additional Assai stake of €472m in November, enabled Casino to marginally reduce its Net Debt at the French perimeter by c. €339m.
- This is partly due to the €524m FCF mentioned in previous paragraph, but also includes €400m in interest payments, €200m in in outflow concerning the sale of Leader Price.
- Casino has reduced its overall bond debt during the year by €673m via debt buybacks and the maturity of the 2022 Notes. Subsequently, Casino have cancelled a further €66m of debt in Q123, including the repayment of the €36m bonds that matured earlier this year.
CGP:
- With this transaction/dilution, CGP formally gives up any residual hope that its assets will - one distant day - be sufficient to put Naouri back in the money (all the way through Euris). If Naouri is hoping to retain control and ultimately have actual economic ownership of the remaining 85% of the merged entity, then he will have to put CGP through a Sauvegarde and stop paying down the short-dated bonds at the earliest convenience.
-At CGP, assets still vastly exceed liabilities, but cashflow remains the problem. A term-out of the bonds (potentially still possible for what has become a mere finance holding), would give him time to realise these assets, but it may be worth asking legal if CGP could pay dividends in the interim. We are not sure how welcome a third Sauvegarde would be at Rallye and above
Random thought:
- As we have written before, controlling France Retail through the layer cake that now is Euris - Finatis - Fonciere Euris - Rallye - CGP may not be Naouri’s plan anymore. With the French retail assets performing as poorly as they do, the €500m capital raise could be heavily dilutive. A subsequent cash demand at the entity might require further investment.
- The actors behind Teract and their banks are among the best connected in Paris. Surely they can find a back door that motivates the one pivotal figure in the first place. It raises the question is Naouri, with another asset swap, buying his future with friends’ money.
With so many moving parts, happy to discuss further.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk