Casino - Further disappointment, this time from Cnova
All,
Please find our unchanged analysis of Rallye/Casino here and
an updated addendum for Cnova here.
Unlike the African prince, who used to urgently need our money to open up a bank account, promising in return to share his outlandish inheritance, Naouri’s kingdom is real. But all the same, he needs to urgently find someone to invest into Cnova before he can divest it at a sufficient premium. Last year he seemed to have found the stock market. This year it seems he has been found out. Cnova's disappointing development coincides with performance in other segments and is yet another case in point of our most recent analysis, as to how long Naouri can afford to hold on to his options.
Sale of Cnova:
- Casino holds 64.8% directly and even at current valuations of c. €5 per share, it is worth €1bn directly to Casino. This would deleverage Casino, and more importantly improve visibility of the underlying French retail business. However, we don’t see that as a realistic possibility in the short term.
- Firstly, the business needs cash. Casino/Cnova acknowledged that the Cnova had a cash requirement of c. €300m to invest in Octopia and C-Logistics, Cnova’s intermediary business. Any sale of the business currently would be at a discount, in order to raise the additional liquidity.
- Secondly, GPA have a pre-emptive right to sell their 34% stake prior to Casino selling any of their shares. So unless Casino can find a buyer for the whole business at current market cap of €1.75bn, any partial sale will be for GPA’s benefit first. Casino would benefit from GPA exiting Cnova, as a shareholder in GPA. Additionally, any simplification of the GPA structure would remove the apparent discount GPA shares trade at in relation to its sum of the parts.
- Therefore, unless a white knight comes to the prince’s rescue with a 100% bid for Cnova (and we don’t think it would ever match Naouri’s valuation), we don’t envisage a sale of Cnova in the short to medium term.
What other options?
- Borrow!
- One option potentially available to Cnova is to raise additional debt at Cnova. Cnova is currently 3.0x leveraged with €326m of Gross Debt (4.5x including leases) so there is limited scope for additional debt. However, only €133m of this debt is external debt, with Casino lending €225m to Cnova under a pooled cash arrangement.
- If Cnova raises external debt and repays the Casino “loan” this would raise additional cash for Casino. It doesn’t raise any additional liquidity for Cnova and its CAPEX requirement.
- Pursuing this route, Casino would need to restructure its covenants on its RCF facilities to exclude Cnova/cDiscount from the covenant calculations.
- This would be similar to the exclusion of GreenYellow in July 2021 from covenant calculations that enabled GreenYellow to become a net borrower. This allowed GreenYellow to raise c. €200m, €109m from Faralon via convertible and €87m via a syndicated credit facility.
- Disadvantage of this approach it doesn’t raise any additional liquidity for Cnova and requires a reformation of the RCF covenants.
Sale of LATAM?
- Unless one envisages the sale of a French retail banner, Casino needs to deleverage by sale of some or all of its LATAM assets.
- But as we have repeatedly pointed out, Casino needs to capture the apparent discount in the GPA shares prior to exiting their LATAM stakes.
- We have outlined three options to release value in the LATAM assets.
- 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.
Do nothing:
- With the sale of the Mercialys stake triggering an additional c. €25m of EBITDA previously eliminated plus the roll-off of the €38m one-off financial expenses in Q1 2021, we don’t envisage Casino breaching its covenants through FY22.
- Casino continues to divest non-core assets and as of December year-end had divested €3.2bn of the planned €4.5bn, with €666m held under IFRS5 assets. Since year-end Casino has completed the sale of its Mercialys stake for €145m leaving c. €500m of further asset sales.
- These proceeds, plus the previously held segregated cash of c. €500m will be used to further deleverage the balance sheet providing further headroom under the covenants.
LATAM Sales numbers:
- Both GPA and Assai reported Q1 sales figures over night (full quarterly reports, including EBITDA will be released in early May), which show continued improvement in the various segments.
- For GPA in Brazil, the transition phase has commenced, away from the hypermarkets to their main brand Pão de Açúcar is underway, and despite a weakness in the overall premium brand segment in Brazil, GPA maintained sales versus Q1 21. GPA’s Exito subsidiary had another strong set of results, with increase in same store sales of 15% in Exito’s main market, Colombia. Both Uruguay and Argentina experienced double digit growth on a same store basis as well.
- For Assai, the focus is on its expansion and the conversion of the acquired stores from GPA. Same store sales are up 6%, with overall sales growth of 21%.
- We await the full quarterly results before further comments, but the initial sales figures are inline with previous company guidance.
Positioning:
- We maintain our 1% long position in Rallye Unsecured.
- We await Casino’s Q1 sales figures on Friday but we don’t envisage any change from the current Casino mission of continuing its deleveraging from sale of non-core assets. We do not expect any major announcement in relation to Casino’s main assets, namely LATAM, GreenYellow, Cnova or its individual banners.
- The timeframe for Casino to deleverage has accelerated. We previously viewed the extension of the Sauvegarde at Rallye to be setting the pace. However, the underlying weakness in Casino France Retail means that Casino needs to deleverage in short to medium term in order to comply with its covenants. But we do believe Casino can achieve this with the already announced measures.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
M:+44 7786 705 806
www.sarria.co.uk