Casino - A thought experiment - Positioning

All,

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We’ve already discussed this with some of you. Recent legal changes within Casino’s French retail assets and the subsequent appearance of Teract on the scene warrant another descent into the docs and some calculations. On the face of it nothing changes. J.C. Naouri plays his beloved shell games and cashflow remains elusive. Floating a proportion of its Crown Jewels via a SPAC is a gambit we’ve come to know from the PDG and might mathematically add valuation cover, but it’s what happens next that intrigues us.


Positioning:

- We’ve taken a lot of pain last year on a flattening trade that’s gone very much the wrong way and then kept going. We still hold those positions - Long the 27s, short the 24s, although as a result of our deliberations, we may be taking some action here when Tomás is back from his deserved holiday. 

- Any new position is likely to be a flattener again, but we’ll let you know.

- We also hold a small 0.25% legacy sliver of the Rallye bonds. That trade was briefly in the money but is now indicated around 4 cents. We will be letting that go now.


The SPAC idea:

- M-A. Zouari, fellow North African, controlling stakeholder of Picard and one-time franchisee of some 150 Franprix and Monoprix stores around Paris controls a SPAC called “Teract" together with telecom billionaire Xavier Niel and Ex CEO of Lazard France: Matthieu Pigasse. Teract has already invested in consumer retail assets by merging with InVivo, owner of garden centre chain Jardiland and a food store chain: Frais d’Ici. Newspapers are full of plenty more information.

- So when there is a SPAC out to buy undervalued retail assets and the #4 French grocery player is in financial distress, then Paris is just not big enough to avoid conversations between the two, never mind that Naouri and Zouari have been in business with each other for a long time.

- The idea is to float some of Casino’s French assets on the stock exchange in a simpler vehicle than the complex and distressed Casino Guichard Perrachon (CGP) structure. In the first place that could raise the valuation of those assets and therefore bring profit to both parties.


Motivations and Constraints:

- Zouari and Co want the star assets: Monoprix and Franprix, merge them with their entity and presumably raise more equity on the back of that. In the context of Teract, they are primarily financial engineers in it to lift the conglomerate discount on the good assets in the first place.

- In return for selling his Crown Jewels, Naouri wants not only a better valuation for CGP, but really has to make progress towards bringing his debt pile under control. Creating yet another layer of leveraged finance holdings cannot be his purpose, nor will he be satisfied with a slightly better valuation of Rallye debt if it doesn’t materially improve his own position.

- If Naouri does not end up playing a direct controlling role at Teract following any sale, then such a transaction is likely to amount to an asset sale out of a restricted entity of CGP, which - to avoid asking the 26s and 27s for a waiver - is capped at €140m, 75% of which is supposed to be in cash after 180 days. There are a number of further restrictions. However, Casino can subtract from the asset value value any liabilities and senior debt that move along with such assets, so that the €140m really represent a limit on Net Asset sales, or equity value. 

- The bank debt is secured on the retail assets and will not want to give that up. Above netting of debt from asset value however only works if the debt travelling along ceases to be an obligation of CGP or subsidiaries, i.e. to make the transaction large enough to be feasible, the bank debt would have to move into the new entity (Merged Entity) and give up its claims against CGP. To agree to that, the banks will want to keep. LTV and leverage stats under control in the Merged Entity.

- Cross-holding banks at Rallye have been said to have written off their exposure to Casino. We cannot verify that and for now will assume that banks will condition their consent on an improvement of their coverage at Rallye. We will relax this assumption later. 

- The French courts and administrators - we think - are unlikely to entertain a third Sauvegarde at Rallye and above.

- A revaluation of Monoprix and Franprix should add at least 10 cents of coverage to the Rallye banks and quite possibly a fair bit more. Under no scenario have we been able however to bring Rallye bondholders back into the money.

- None of this shell game improves cashflow and maturities are coming closer. If anything, dividends out of the Merged Entity would create a tax liability for Casino that it may not have had before.

Scenario 1) CGP becomes a finance holding:

- Motivation: Initial valuation uplift from placing French retail assets into a cleaner structure.

- Motivation: To manoeuvre himself back into the money - or anywhere close - Naouri really has to restructure a lot of debt, which in France and in particular for a retailer is more easily done if the filing entity is a mere finance holding. To file for a less risky Sauvegarde Acceleree and compromise bondholder rights in the process, CGP ideally has no more operations and only functions as a small investment holding with few employees. We are not sure how far the recent creation of a legal entity for the French retail assets have already taken that concept. If this was the very motivation for it, then perhaps not all of the retail assets need to move to the new entity. For now, however, we assume that a Sauvegarde filing for CGP would still involve those assets and possibly even ignore any legal changes in so far as they might infringe creditor valuation/rights and have not yet hardened.

- Constraint: If all of France Retail moves into the Merged Entity, then there is not enough bank debt (even including Quatrim) to bring the Net Asset value down by enough to allow Terac to acquire a reasonable stake. Fro the purpose of this scenario we are assuming that CGP can fill the remainder up with an intracompany loan, but that’s something for a legal team to answer.

- CGP would become a finance holding with primarily a collection of South American assets, an intracompany loan - which would have to be monetised most likely - and a controlling stake in the Merged Entity, a 65% holding in Cnova and some other bits and pieces, altogether financed by a little bit of Segisor debt and then the bonds in a first instance, ahead of the perps. Note that monetising the IC loan would likely require a large public share issue from Teract post-transaction, which, if CGP want to retain control of France Retail, would limit the size of the stake that Terac could buy for its current shareholders in the first place. 

- Bonds would sit at approx. 45% LTV, justifying perps and shareholder value but cashflow should be even more constrained than before. This would justify a classic Sauvegarde Acceleree with the aim of terming out the bonds. However, we are not sure if this would forcibly bring the perps forward.

- The result might buy Naouri time at CGP, and eventually create mathematical value at Rallye, but we don’t think Rallye can easily be involved in another Sauvegarde and so Scenario 1 looks like a low-risk, but underwhelming solution.


Scenario 2) Only Monoprix and Franprix move:

- Motivation: Maximum valuation uplift from moving only the best assets into the Merged Entity.

- Motivation: Zouari is probably less interested in buying the rat’s tail of struggling businesses that are Geant, Casino, Convenience and more. 

- Motivation: CGP publish little detail, but there is perhaps a chance that some of these businesses would benefit from a Sauvegarde, where a French company can restructure also its operations in a way that it otherwise cannot. 

- Constraint: The cross-holding banks would have to allow it. However, they might do so, if they saw no alternative. Then consenting to move the CGP portion of their exposure into the Merged Entity would still be the way to go.

- Constraint: A vast amount of trade payables would come due, which would generate an urgent cash need to plug the gap. If Naouri wanted to go take such an entity through Sauvegarde, he would have to know where to find it before even entering any Conciliation.

- Instead of holding a large intracompany loan to the Merged Entity, CGP would remain with Geant, Casino, Convenience, etc. and retain the Quatrain structure too. All else remains the same as in Scenario 1.

- The large cash need to stabilise operations at CGP in case of Sauvegarde would vastly drop value accruing to perps and shareholders and a sober calculation would even require a haircut and partial equitation from the bonds. Rallye and its layer cake, but also Kretinsky and independent shareholders would be wiped out with any fresh cash taking the equity (think Orpea). Cashflow should be even more constrained than before, although it may improve a little bit from any operational restructuring at the struggling formats.

- If Naouri can find the capital to stem the payables outflow (perhaps among his new friends?) Then this could be his ultimate solution to leave Euris, Finatis, Fonciere Euris and Rallye behind. It would be a big gamble and half of Paris would be closed to him afterwards, but once he can return the WC financing, he’d be in-the-money owning CGP. If in Paris you have Lazard and Rothschild on your side, you can do anything. He’d be a billy.


Middle Way:

- As long as Naouri does not have to do anything radical to stay in command, he is probably unlikely to do it. If he plays for time now, he can still pursue the more aggressive route at a later date. The later the easier.

- On reflection then, there could be a middle way. Faced with the need to restructure at least maturities, Naouri could offer the Perps, who are trading around 20 c/€ to roll into a fixed maturity bond at a very deep discount. Sauvegarde could be a good place to do this in, but it’s not required. This should raise value to Rallye by close to €500m - good for the banks, but not really moving the needle for himself. 

- So irrespective of the precise split of assets that Teract would buy themselves into, on balance we think that Naouri, the banks and Teract will all be happy to play the waiting game for a little longer. 


Tomás will be back next week.

Meanwhile, yours truly is here to discuss,


Wolfgang

Wolfgang FelixCASINO