Is it game over for Jean-Charles Naouri, chairman of Casino Guichard-Perrachon SA and its majority shareholder Rallye SA? It looks like the tower of debt-laden corporate structures that he uses to control the French supermarket group is about to topple – although we should be cautious about writing him off just yet.
Rallye and the other companies in Naouri’s chain of control over Casino said late on Thursday that they would enter so-called safeguard proceedings, which allow businesses time to restructure their debts. Tackling Casino’s horribly complicated holding structure – with each entity needing to send money up the chain to service debts at the level above – is long overdue. It has become a magnet for short-selling hedge funds, starting with Carson Block’s Muddy Waters in 2015.
The latest crisis was forced by a precipitous decline in Casino’s share price. That reduced the value of Rallye’s assets, as its holding in Casino is its chief resource. It also meant that it had to post more collateral in the form of Casino shares against its debt. Rallye’s borrowings will now be restructured. It had 2.9 billion euros ($3.2 billion) of net debt as of December 31.
Depending on how this is achieved, Naouri could lose control of Rallye: A big debt haircut would typically lead to that and Rallye’s shares fell by as much as 63 percent on Friday. But we should remember too that the chairman has fought against his detractors for four years, so his exit is by no means guaranteed. Bruno Monteyne, an analyst at Bernstein, points out that the safeguard proceedings are more lenient than the alternative procedure in France to deal with financial distress (known as recovery proceedings).
Beyond Naouri’s immediate future, the events at Casino raise two issues for investors. First, Rallye owns 51.7 percent of Casino. Depending on how its restructuring is executed, that chunky holding may have to be sold at some point, putting more pressure on the languishing Casino share price.
More positive is the chance for Casino to cut its dividend to a more manageable level, after keeping it high to service Rallye’s debts. Charles Allen at Bloomberg Intelligence notes that the company projects French free cash flow of 500 million euros this year, which is just enough to pay 400 million euros in total dividends. Assuming the payout was maintained at last year’s 3.12 euros per share, that puts the prospective dividend yield (the payout as a percentage of the share price) at a whopping 10 percent. It would help Casino immensely if it could reduce this, or even scrap the dividend altogether until its problems are resolved.
Cutting the payout would give the grocer room to pay down its own hefty borrowings (net debt was 3.4 billion euros at December 31 2018). Ideally, it would be able to invest in its assets, including the Monoprix chain that is such a feature of Parisian life.
Still, it’s difficult to be too optimistic. On a call with investors on Friday, David Lubek, the Casino finance director, said Rallye hadn’t lost its control over Casino. That raises the possibility of Naouri continuing to have influence over its decisions.
There’s one potential wild card in all of this: A sale of Casino. French rivals such as Carrefour SA have a duty to their shareholders to see if there’s anything they can pluck from the carnage, although domestic suitors might face considerable regulatory and political hurdles. While the French don’t usually welcome foreign M&A interlopers with open arms, there is a case for Amazon.com Inc. to take a look. It already has an online partnership with Casino, and acquiring the Monoprix and Franprix chains would give Jeff Bezos’s company an enviable store network in Paris.
This is only the start of the great Casino-Rallye unwinding. It’s a much-needed development but there may need to be more pain before the truly radical options are considered for the grocer.
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Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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