Carrefour: Up for grabs, again?

Carrefour has become flavour of the season as M&A news is recurring for this French grocer. News reports state that Auchan is preparing a fresh acquisition bid and is in talks with a PE fund. Any such development reiterates our conviction of the stock’s attractiveness. However, we doubt if any such announcement would be made before the upcoming French Presidential elections.

It seems Carrefour has become the blue-eyed boy among the European food retailers. The stock is up more than 10% since the beginning of New Year, taking the last one month’s gains to c.17%.

And, this is following a mixed response to the company’s Digital Day (hosted on 9 November 2021). Perhaps, investors are once again turning optimistic following yesterday’s news that French peer Auchan is planning to make a fresh bid for Carrefour.

A brief background

The first news (of Auchan approaching Carrefour) emerged three months ago in October 2021. Reportedly, the acquisition offer was turned down by the target company as the payment proposed was 70% in cash (at €21.5 per share) and 30% in the acquirer’s shares. Carrefour’s key shareholder, the Moulin family, expressed discomfort with the 30% payment in Auchan shares and, instead, demanded an all-cash deal of €22 per share. The complex structure of Auchan posed difficulty in valuing the share-based payment offered by Auchan. Poor health of the business was also a turn-off – Auchan largely relies on ‘out of favour’ hypermarkets to make money. It has also been losing market share, especially on its home turf, France.

Subsequent news emerged last month that Auchan was planning to rope in PE players to prepare a fresh deal. This was one of the key reasons why the stock price started climbing. Similar news was reported by Bloomberg yesterday, and no wonder the buzz has pushed the stock price above €18 per share.

Our view

Carrefour has been one of our top picks among the European grocers under AV’s coverage. Our investment case did not include the possibility of M&A. The business’s health has improved noticeably over the past few years, the retailer is no longer losing market share in France (even in hypermarkets). In fact, the top-line performance has been satisfactory in France and very strong in Latin America and Spain. The acquisition of Grupo Big is likely to add further muscle in Brazil, helping it to widen the gap with arch-rival GPA. Moreover, the group’s profit margins have improved continuously.

Any M&A activity will be a cherry on the cake. While the Canadian firm Couche-Tard’s bid was shot down a year ago (after opposition from French politicians), such road blocks look unlikely for a possible combination of Auchan and Carrefour.

For Carrefour’s shareholders, any deal with Auchan will only make sense if the offer comes at a substantial premium, as the combined entity might face hurdles operationally / strategically, e.g. in preserving market share, clocking lfl sales growth in France due to the very high exposure to hypermarket format. As a positive development, Auchan is looking desperate for a deal. Hence, Carrefour might be able to extract an extra pound of flesh if both parties converge on the negotiating table again. In other words, Auchan might be required to sweeten the previous offer, which includes a cash-based deal plus a higher bid price vs the previous figure of €21.5 per share.

However, one possible roadblock could be the upcoming French Presidential elections, as any combination would lead to job layoffs and will possibly turn problematic for politicians.

Although the possibility of a deal is quite likely, we would not be surprised if Carrefour is also approached by other players (e.g. deep-pocketed PE firms) following the upcoming elections.

In a nutshell

We reiterate our faith in Carrefour and believe the stock’s valuation is still attractive. Don’t be surprised if Mr Bompard goes the extra mile (pertaining to M&A) which will also reaffirm his reputation as the turnaround expert (Fnac Darty was the first one!). A big shot in the arm before he eyes the next assignment (possibly).

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