Casino: A Brief Recap & How Did We Get Here
Casino is all set to execute an ownership change and a restructuring plan. We expect the overhaul of the French performance to prove fairly difficult and the Consortium’s business plan/financial estimates unlikely to be achieved.Our target price is reduced further to 0.12 per share. Better to stay on the side-lines in our view, until such time as the skies clear.
Our whole research is available on request.
Our whole research is available on request.
Casino has long been a disappointment. In recent years, the CEO Mr. Jean Charles Naouri had tried to address the pain-points like unsustainable debt levels, a complex business structure and allegations of financial engineering.
Just when the grocer had been hoping to recover from the pandemic-led headwinds, unforeseen inflationary headwinds emerged to break the camel’s back. As cash-strapped customers scouted for better value for money, Casino was caught with its pants down as its prices were considerably higher/uncompetitive vs the likes of Leclerc and ITM. Another big loser in the French landscape was Auchan. While all banners faced the heat, Casino’s big box stores (hypers and supers) were the worst hit, with the French business grappling with negative free cash flows. The management’s failure to walk the talk and the subsequent safeguard proceedings then forced the company to find new buyers.
Come mid-2023, and a steep decline in the French performance was to drain away all the available cash. Even the disposal/proceeds on a healthier Assai (LatAm’s cash & carry business), the full drawdown of the French revolving credit facility (end-June 2023) and the sale of non-performing French stores to ITM was not enough to keep the business afloat. Finally, Mr. Naouri was forced to throw in the towel.
A new captain to steady the ship
Just as the French group 3F (led by a trio of French businessmen Xavier Niel, banker Matthieu Pigasse and retail entrepreneur Moez-Alexandre Zouari) abandoned its bid for Groupe Casino, the stage was set for the Daniel Kretinsky-led consortium, as the only bidder left for the struggling French grocer. On 5 October 2023, Casino and the ‘Consortium SPV’ (includes EP Global Commerce, Fimalac, Attestor and certain secured creditors of Casino) announced the lock-up agreement related to the financial restructuring. The key points are as follows:
• A new cash equity injection of €1,200m, of which €925m subscribed by the Consortium SPV and €275m fully backstopped by the backstop group. The latter includes the following order of priority: a) secured creditors (RCF and TLB), b) unsecured creditors, c) perpetual creditors, d) all creditors (secured, unsecured and perpetual), and e) the shareholders, as the case may be
• Conversion into equity of all unsecured debt (€3,528m) and some secured debt (€1.355bn).
• In summation, the agreement provides for a reduction in net debt of €6.1bn for Casino
• The agreement also includes provision for the issuance of three warrants, amounting in total to 8.7% of the Casino share capital on a fully diluted basis
• Post restructuring debt of around €2.7bn (RCF: €711m, Reinstated Term Loan: €1,410m and Quatrim: €567m)
• Completion of the financial restructuring by March/April 2024. The appointment of Mr. Philippe Palazzi as the new Chairman and CEO after the completion of the process.
• While the existing owners will hold just a 0.3% stake in the post-restructuring company, the Consortium is likely to have control with a >50% stake (including its stake in the warrants). The new shareholding structure is proposed to be as follows:
Source: company filings
Not all that glitters is gold
We would not be surprised were investors to have high hopes of a post-restructuring Casino/ to appreciate the concrete steps announced by the new owners – infusion of new money, drastic reduction in debt obligations and a focused business overhaul. On paper, this blend has all the ingredients required to transform Casino into a healthy entity.
However, we take a more cautious stance and believe that the quantified targets in the business plan (2023-2028 period) are unlikely to be achieved.
France – an uphill task
The biggest headwind for Casino is likely to be the further intensification of the French competitive landscape, which has been one of the toughest in Europe. In the near-term, we expect the competitive pressure to deteriorate for most retailers as volumes are still in the red and customers are likely to remain highly price sensitive.
While Casino’s high concentration of proximity stores in Paris/other urban areas is a positive during normal conditions, consumers are likely to remain highly price sensitive over the next 12-24 months. Regarding profitability, Casino’s biggest profitability lever is disposing of larger/non-performing stores to ITM or overhauling them internally. However, if history has taught us anything, even the successful turnaround plans of grocers take many years to achieve a 100bp margin improvement on a sustainable basis. Moreover, labour costs are unlikely to decrease, and Casino could face a ‘Catch-22’ situation of balancing between lower prices/market share vs preserving profit margins.
Not worth the dime
We see Casino as becoming a healthier business once the restructuring process/change of ownership is executed. The grocer should generate relatively stable sales, improved profitability, a leaner balance sheet and sorted business structure.
However, the grocer is likely to remain a high-risk bet (especially on the execution side). We recommend remaining on the side-lines, unless the stock’s valuation crashes to more realistic levels.
This is just a glimpse of the original research we published. Please do not hesitate to contact us to access the full research.
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