Casino - Naouri reaches decision time - Postioning
All,
Please find our updated model here.
Since adjusting our position to a net short on 2024 bonds before the release of FY22 numbers earlier this month, all bonds have experienced significant price falls. This is primarily due to the poor Q4 performance in top-line sales, and the surprising working capital outflow in H2 2022. Additionally, the disclosure of €239m of overdraft drawdown (unsecured) has further spooked bondholders, with investors now contemplating the next steps available to Casino. We are concerned that announcements from Casino could meaningfully tilt the market's assessment of his strategy and prefer to take profit here as the fundamental downside to the 24s is limited to a Sauvegarde scenario in 2023, in which case there should still be ample value underpinning the current trading price.
Investment Considerations:
- We are instead buying 2.0% of NAV in each of the 24s and the 27s on the "bet" that Naouri will not seek to enter Sauvegarde soon and instead buy himself the option of better market conditions by foregoing the discount on the 24s, which in the scheme of things is not much. We see the longer-dated NY-Law bonds as value protected. These bonds have a 20% running yield at the current valuation and offer upside in a near-term Sauvegarde scenario.
- With this long position we are taking on the risk of a short-term Sauvegarde filing, but any indication we have currently suggests that Casino can still avoid that scenario.
- We will consider a small short in the stocks once we have better information on the cost.
- The biggest determinant of the value of the bonds is which steps Casino/Naouri undertakes to complete its proposed merger with Teract entity and if he continues to have the motivation to secure value via the remaining CGP entity.
Which way forward?
- The announcement concerning a proposed merger with Teract centres on an 85:15% split of equity in favour of Casino on a debt-free, cash-free basis. However, under several of our scenarios, we envisage Casino transferring debt across into the new Merged Entity (ME) reducing Casino’s 85% on day 1. Subsequently, ME raises new equity, primarily from Teract shareholders, which would dilute Casino further and potentially hand Teract shareholders control of this new entity.
- However, we are conscious that under this scenario, Teract would have to raise over €1bn in new shares to gain control. Casino Guichard Perachon (CGP) would have transferred more than €140m of Net Asset Value (on a market value basis) into the new entity, but there is an argument that at book value this clause would not be breached.
- If the Secured bank debt is transferred into ME before any Sauvegarde of CGP, this would leave the bondholders the most senior creditors, and although they would have no direct cash-generating asset, they would benefit from holdings in ME, the listed holdings in Latam and Cnova, and the unlisted at CGP including Relevanc. Their position as the most senior creditor is likely to prove difficult for Naouri to if he wishes to cram down the bonds and control the Sauvegarde.
Conflict:
- This raises the conflict in all of the decision trees faced by Naouri. Transferring too much senior secured debt into ME leaves the bondholders in a favourable position and difficult to cram down in any proceedings. However, not transferring Senior Secured debt into ME, is more likely to fall foul of covenants on Asset Transfers, Investments and Mergers.
- Ultimately, the resolution of the conflict is determined by motivation of Naouri. If he finds he can gain sufficient control of France Retail through a dilutive cash raise at the Merged Entity, then he may be handing over the keys at CGP. If that is complicated or expensive, he may wish to control the CGP Sauvegarde and bring ME into the plan as white knight, or buyer of certain assets - i.e. intellectual property and ME shares.
- As always, an obvious way of creating equity value at Casino and beyond is a distressed tender/exchange of Casino bonds and perps, or a Sauvegarde. To capture that value, however, Naouri needs not only a white knight but also needs to have creditor classes in place who will vote favourably on his plan. In that case, he’d be motivated to transfer the least amount of debt to ME before a CGP Sauvegarde and only offer the escape route in return for a “yes” on his plan. If he pleases all the secured debt with an early transfer now, the bondholders will run riot at CGP and he will be lacking the stick he needs to cram them down (would a “yes” from the Perps be enough?). He would be losing control of the majority stake in France Retail and we don’t think he needs to give that up.
Quantrim:
- In our discussion above, we have broadly ignored the Quantrim bonds. Quantrim benefits from a specific asset security with ME the likely new tenant, as well as a guarantee package that’s broadly similar to that of the RCF and the TLB. Although Hyper and Supermarkets have underperformed, they still generate 40%+ of Casino France's Retail sales and are an important component of any recovery story. IGC Fonciere generated €37m trading profit (EBIT) in FY22 and this is just about sufficient to meet the interest costs of the Quantrim bonds. With Casino proposing to purchase a further €100m bonds at 94%, with the collateral staying the same, recovery for this short-dated paper is likely to be close to par.
- If the merger goes ahead, we would expect Quantrim to be refinanced, either at the ME entity, or a new entity separate from any potential Sauvegarde proceedings. (However, if Naouri wishes to have another asset class in any proceedings, Quantrim may be left at CGP).
Covenants and Cashflow:
- Usually, Q1 is the tightest quarter for liquidity and covenant purposes but following the sale of a further stake in Assai in mid-March, it would be unlikely that these covenants are breached in Q123. Note, the Gross Secured Debt covenant is gross, and Casino would have to retire Secured debt and/or allocate some of the Assai proceeds into a segregated account for Secured indebtedness.
- Additionally, the unusual movement in Working Capital, and specifically inventory in Q4 may result in a less pronounced negative working capital movement in Q1. It appears that Casino overstocked in Q4 to the tune of €700-800m and although management acknowledges they missed the Q4 sales target (our estimate €200-250m), this is still a significant overstocking event. If it is true that the overstocking was “strategic”, however, the unwind of this overbought stock will reduce any working capital outflow normally associated with Q1.
LATAM:
- The process of splitting Exito (the Colombian assets) away from GPA is in process and is likely to conclude in late Q2. However, initially, this is not going to generate any cash proceeds for Casino France, unless they subsequently sell their holdings. The splitting of the entities is an attempt to raise the market value of the combined group to provide additional asset coverage to CGP.
- Casino has already relinquished its controlling stake in Assai, and going forward Assai results will no longer be consolidated into the Casino Group accounts. This has no impact on the covenant calculations as the covenants are only related to the Casino France perimeter.
- However, the sales of Assai stakes have indicated to the market Casino’s willingness/urgency in liquidating its assets, and therefore the uplift in value of splitting Exito away from GPA potentially might be diminished. We would expect Casino to have exited its LATAM exposure by year-end.
Next Events:
- With LATAM disposals likely to be H2 events, the next step at Casino is further details on the potential merger with Teract. Although the announcement states an 85/15 split in equity on a debt-free/cash-free basis, the level of debt transfer is important in determining the fate of the outstanding bonds.
- Q1 results concerning sales and covenant compliance is not due until early May.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk