Casino - Too many options and conflicts - Positioning
All,
Please find our existing model here. We will update the model after the Company report its FY22 results on Friday.
Casino continues to be an extremely active name for us with significant engagement from a number of funds. We have spoken directly with many of you surrounding our thoughts on which retail banners may be merged with Teract in order to achieve a higher valuation. More importantly, we have analysed the various options about which debt travels to a new merged entity and which debt may be left behind at Casino. But the reality is there are many unknowns, and therefore we are derisking our position prior to the results on Friday.
Investment Considerations:
- We are unwinding our long 2027 bonds at 55.255 and our short 2024 bonds at 83.25, resulting in a loss, prior to the release of FY22 results on Friday. This trade has not performed as we expected. The front end has rallied on the expectation of a continuation of the tactic of kicking the can down the road, which would result in repaying short-term debt, including the 2024 bonds.
- However, although we expect the 2024 bonds to be repaid in the fullness of time, we don’t think it will be a linear pull to par over the next year. We are therefore keeping €5m of our short at current levels, but are closing out our long in the 27s.
- We are not optimistic about Casino realising a coherent plan on Friday and are therefore happy to remain short at current levels.
Options:
- We have spent a significant amount of our time on analysing various options at Naouri’s disposal, including a partial or full merger of French retail assets with Teract. Our base case is a merger of some of these assets but the separation of Monoprix and/or Franprix for example will undo the significant work Casino France has undertaken in FY22 to centralise the majority of its distribution and marketing efforts.
- And the fact that rumoured “solutions” is contrary to the efforts of previous plans is the frustrating aspect of any decision tree process.
- We don’t see the value of Casino to continue selling non-core assets, like it has previously including Floa bank, GreenYellow and a stake in Assai in November, to just pay down short-term debt and not deal with the overall debt burden holistically, but that is what Casino/Naouri has done over the last couple of years and it has favoured the short-end of the curve of Casino substantially.
Driving value at Rallye:
- Ultimately, the driving force for any decisions at Casino is the ability to increase the recovery value and in turn the equity value at Rallye. We are willing to accept that some of Casino’s brands are undervalued due to the conglomerate nature of Casino, and a merger with another listed entity, namely Teract, may allow the market to fully assess the true value of these assets.
- However, any uplift is unlikely to be large enough in size to turn the needle at Rallye. The easiest way to increase the value at Rallye is by purchasing Casino or Rallye debt at a discount. The ability to capture this discount needs to be balanced with keeping the operating assets as going concerns. And this is the second great conflict at Casino. In order to capture a discount, Casino management need to present a negative picture. However, in contrast, it needs to paint the opposite to its suppliers and credit insurers to continue to enjoy the negative working capital a retailer normally does.
Upcoming Results:
- We have already received the Q4 sales numbers and by all accounts, it is unlikely that the actual earnings will provide any relief to credit investors. We have seen continued margin contraction at Casino and with underwhelming sales numbers, it is difficult to model improvement in the underlying cashflow.
- We are not expecting Casino to demonstrate the way forward for its upcoming maturities and we suspect the market will be disappointed with the lack of a plan. The Company may discuss potential options, but our suspicion is that the call will focus solely on operational aspects of Casino.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk