Casino - Parallel valuations?

All,

Please find our unchanged analysis here.

So Casino have entered Conciliation sooner rather than later. Even though that gives the company less time to burn value before a restructuring, we are not any more bullish now than we were before. In fact, we have received some ugly advice out of France. Unlike most other restructuring laws in Europe, the French system is lacking a valuation mechanism for going concerns. In Germany for instance a plan requires an authorised (and cumbersome) IDWS6 opinion. England operates a put-up or shut-up mechanism. France operates neither. The only court requirement to sanction a scheme is that a class (bondholders) must not be worse off than in the alternative - that being Redressement Judiciaire (administration). Because France Retail is a grocer, that alternative carries a high risk of liquidation and so the valuation of France Retail underlying the plan can be set extremely low. Aware of this rule, but believing that Teract would not want to be as aggressive and that Casino might seek to find an out-of-court solution or sufficiently shelter France Retail from the risk of administration and that a court would only accept a single valuation, we had previously assumed that the implied valuation of the Teract merger would form the basis of negotiations. However, we have recently been assured that there is no need for that and that two separate valuations could coexist. The early entry into Conciliation suggests as much. This opens the door to a very abusive scheme, which would dramatically compromise France as a jurisdiction (again) and impair unsecured creditors further than we thought reasonably achievable.

Investment Rationale:

- We continue to hold a small 2% of NAV position in the 27s, which we originally bought too early - at 30c/€. For fear of seeing the world too negatively all of a sudden, we will hold on to this position until further (any public) information surfaces. 

- Fundamentally, we continue to believe that the bonds are almost covered. But recent advice has spooked us and perhaps this version of Sauvegarde turns out even worse than the old term-out scheme. If anything, the fact that the actors are mostly the same suggests the outcome will be too - 35c/€ tops.

- Even if bondholder recovery is calculated on artificially low valuations, upon exit from Sauvegarde, market valuations could again be much higher. But the allocation bonds will receive could also be structured not to benefit from such an uplift.

- If abusive, we feel this Sauvegarde could set a very negative precedent in that the difference between going concern and liquidation valuation is extreme. 

French Retail Valuation:

- As we are now entering a formal court process with Casino, and specifically, Casino Guichard Perrachon, the alternative value for the French Retail assets will be determined via a process of Redressement, which has the potential for showing zero recovery value for bondholders. We have lowered our overall valuation of French Retail assets from €3bn (0.21x sales) to c. €2.4bn (0.17x sales).  

- On that basis however, with average RCF drawings in FY22 of €1.23bn, the net value reduces to €1.2bn, insufficient to meet the borrowings of the Term Loan Bs. The EMTNs and HY bondholders could be left with zero interest.  

- The mitigating factor here is the previous statements from both Teract and Casino, which indicated that the merger, on a debt-free basis, would be an 85:15 split. We value Teract’s assets at c. €500m, which would imply a debt-free valuation of Casino Retail assets at €2.8bn or 0.2x sales.  

- Using this metric - as we have done before, the value of Retail France, less RCF drawings of €1.2bn plus other unsecured borrowings that is likely to be repaid (CP, unsecured overdraft, and Monoprix lines totalling c. €500m, would equate to c.€1.1bn

Remaining Assets at CGP in Sauvegarde:

- Casino still owns an 11.7% stake in Assai and a 41% stake in GPA, worth €350m and €360m respectively. Although there is theoretically a c.€900m valuation implied from the trading levels in Cnova, the ability to crystallise this is minimal. In addition, the fortunes of Cnova are linked with the trading operations of France Retail, and it is difficult to split the businesses from each other. On the basis of “valuation in the alternative case”, 0ur expectation is now that this is worth a fraction of its implied value, and we have increased the discount from 50% to 80%.   

- Once addressed, there could be limited equity value in the Quatrim vehicle, but we are accounting for it.  

Recovery using valuations based on the “alternative case":

- Therefore, the total assets excluding the French Retail assets would equate to merely €970m. This includes €90m for RelevanC and other unlisted assets.

- As we stated above, the residual equity value of France Retail in the “alternative case” post RCF and other borrowings, is €1.1bn, bringing total assets to €2bn.

- Also in line for these proceeds before bondholders are considered would be the TLB, which could be fully or partially transferred to the merged entity. 

- Arithmetically and without further costs or similar considered, this would require that the bondholder package could be worth no more than 25c/€ - once again under valuations referencing the alternative case. We note that there could be scope to be even more aggressive, which would even impair the TLB.

- Upside could come via an exit from Sauvegarde and valuations returning to normal. However, we fear that the package could be structured in a way that leaves bondholders with no such participation. 

Cross-class cram down:

- Whether the TLB moves fully or not, the fact that Casino are entering Conciliation now suggests that sufficient (one) impacted secured creditor class has voted in favour of the plan. At a bare minimum that is all that is required to strip unsecured bonds off their votes. 

- If the plan can indeed rest on a different valuation to the Teract merger (or if the merger terms are now being altered), then the CEO Naouri, the only person who can propose a plan, is incentivised to be as aggressive as possible.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk