Casino - Impact of Mercialys
All,
Please find our unchanged Casino analysis here.
Casino are due to report their Q1 sales and covenant calculations on April 22nd. We have been observing Casino’s recent transactions in Mercialys shares and a number of you have been enquiring about its impact on covenants. In the past, Casino held 40% in Mercialys which Casino consolidated at equity because it held control. Whenever Casino sold an asset to Mercialys at a profit, it could only recognise EBITDA in relation to the non owned portion of Mercialys. Casino is now selling down its Mercialys stake, and therefore recognising the previously eliminated EBITDA that related to the successive stakes sold.
We have been calculating the impact on covenants from these transactions.
Mechanism for recognising additional EBITDA:
- When selling a property at a profit to a controlled but partially owned entity (Mercialys), the seller (Casino) is required to eliminate the intercompany portion of that profit.
- Now that Casino is selling down its stake in Mercialys, previously eliminated EBITDA needs to be recognised.
- This EBITDA is recognised in the period of the sale of the Mercialys stake even though the property may have happened years ago.
- The sale of the 6.5% stake in Q1 22, will result in an EBITDA recognition of c. €25m in Q1. This EBITDA has no cash impact and non-recurring but will boost LTM EBITDA calculations for covenant purposes for the four quarters of FY22.
Evolution of Mercialys stake:
- In 2005, the Group’s shopping centre properties in France were spun off through the creation and initial public offering of the Mercialys property company. In July 2018, Casino reduced its stake from 40.3% to 25.3% via TRS, which net of costs, yielded €209m in proceeds.
- Subsequently, in August 2020, Casino transferred a further 5% stake in Mercialys to the TRS for an additional €26m. The TRS was closed by December 2020, when Casino recognised a loss of €72m, the difference between the TRS proceeds and the actual price achieved. This €72m was recognised as Other Operating Expenses in FY20.
- In total, Casino paid out €47m in FY20 in respect of TRS losses (€72m less the €26m value for the 5% stake). Casino’s stake in Mercialys at year-end (FY20) was 20.27%.
- In FY21, Casino sold a further 3.41% stake in Mercialys for €24m via TRS. Casino’s stake in Mercialys at year-end (FY21) was 16.86%.
- In Q1 22, Casino sold a further 6.5% of Mercialys equity for €59m via TRS. This reduced its holding to 10.3%. Subsequently, on 4th April, Casino sold the remaining stake via TRS for proceeds of €86m.
Impact on EBITDA in FY20 and FY21:
- In FY20, Property Development EBITDA totalled €64m. This is mainly related to the recognition of previously eliminated EBITDA on real estate development operations conducted with Mercialys. Real estate development operations with Mercialys are eliminated in EBITDA based on the Group’s percentage interest in Mercialys. A reduction in Casino’s stake in Mercialys or an asset disposal by Mercialys of those assets, therefore, results in the recognition of EBITDA that was previously eliminated.
- As quoted in the FY21 Annual Report "the €64 million EBITDA is in respect of property deals carried out in France, corresponding mainly in 2020 to the recognition of previously eliminated margins on property development transactions involving Casino and Mercialys following the decrease in Casino’s stake in Mercialys and the sale of assets by Mercialys, amounting to €45 million and €19 million, respectively”.
- In FY21, Property Development EBITDA totalled €14m, corresponding in 2021 to the recognition of previously eliminated margins on property development transactions involving Casino and Mercialys following the decrease in Casino’s stake in Mercialys.
Sarria’s estimate of impact on EBITDA in FY22:
- The impact of the 3.41% reduction in Casino stake in Mercialys in FY21 allowed Casino to recognise €14m Property Development EBITDA. In Q1, Casino reduced its stake by 6.5%, so therefore Property Development EBITDA in Q1 is going to be c. €24-27m. This is possible, as Casino retained a 10% holding in Mercialys as at end of March, which appears to be the minimum threshold to claim control.
- We believe the sale of the remaining stake via TRS in Q2 (April 4th) won’t have any impact on EBITDA as Casino loses its influence over Mercialys.
Impact on Covenants:
- Casino has two main maintenance covenants, the senior Secured Covenant and Interest Coverage covenant. It is the latter that they are closest to breaching.
- Our model shows Casino twills their covenants in Q1 2022, due to the roll off of €38m interest charge related to the issuance of the Term Loan B which occurred in Q1 2021. We did project the Company breaching their covenants in Q3 without any improvement in the underlying EBITDA.
- The sale of the Mercialys stake will boost LTM for the four quarters of FY22 by c.€25m.
Conclusion:
- If previously we were wondering were Casino marginally downplaying their performance (within legal limits) to allow for capital restructuring at Rallye, we now no longer think that is the case. These transactions clearly demonstrate that Casino management have an eye on managing their covenants.
- 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.
- Obviously, the sale of the Mercialys stake has increased the cash on the balance sheet by €145m which has no impact on covenants but boosted liquidity in a normally tight quarter.
Happy to discuss further.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk