A French Retailer’s Stock Rally Fails to Deter Short Sellers

(Bloomberg) -- Casino Guichard-Perrachon SA shares have popped back to levels not seen in almost a year, but the short sellers who are questioning the French retailer’s accounting aren’t giving up just yet.

Investors have sold short almost 35 percent of Casino’s shares available for trading, according to data compiled by IHS Markit Ltd., meaning it’s Europe’s most-shorted stock. Given the gains in recent sessions, with the shares up 20 percent this year, hedge funds are likely being squeezed, Ben Kelly, a risk-arbitrage analyst at Louis Capital Markets in London, said in an interview.

A French Retailer’s Stock Rally Fails to Deter Short Sellers

“Short sellers are likely to be scrutinizing their positions more and more now,” said Kelly, who recommended covering bearish positions in September and then again in December. “As Casino continues to strengthen there is likely to be more pressure for short sellers to cover. People are finding it more difficult to stay short.”

Skeptics have been saying Casino and its parent company, Rallye SA, have too much debt and use opaque accounting to mask their true financial condition. In October, hedge funds hired a lawyer to argue that Chairman and Chief Executive Officer Jean-Charles Naouri’s stake in Casino is valued too highly on the books of the holding company.

Naouri, who is Casino’s majority shareholder, has said the accounting and financial disclosure are appropriate. Last year he hinted short sellers were ganging up on his companies, unfairly driving down their shares and bonds.

Casino shares have jumped 65 percent in Paris trading since September, the best performance in France’s SBF 120 Index in the period, following the short sellers’ attack. Its fightback included shedding 1.5 billion euros ($1.7 billion) of assets to cut debt and replacing its finance chief, while faring better than domestic competitors in the disruption caused by the Yellow Vests riots.

Naouri also has made efforts to simplify Casino’s complex holding structure that’s likely to give the embattled company “a lot of room to maneuver with respect to the refinancing issue” that Rallye is facing, according to Kepler Cheuvreux.

The 69-year-old CEO’s multi-pronged strategy is paying off for investors, with the shares now trading above 43 euros, well beyond a level that would spell trouble for Rallye’s ability to repay debt coming due this year and next.

A French Retailer’s Stock Rally Fails to Deter Short Sellers

At least 11 companies, including Melqart Asset Management UK Ltd. and Marshall Wace LLP, have disclosed short positions in Casino, according to data compiled by Bloomberg. Media representatives at both declined to comment.

“The shorts targeted the company and maybe they had some valid points,” Ion-Marc Valahu, the co-founder of Geneva-based Clairinvest and a Casino investor, said in a phone interview. “Casino maybe took a little too much time, but it addressed them and the latest figures were great in spite of the Yellow Vests. They will have to cover the shorts.”

While Naouri moved quickly with a disposal plan and the retailer’s French performance appears “nothing short of a business resurrection” if management guidance is correct, challenges in financial reporting persist, according to Sanford C. Bernstein. “The main point to be negative around on the Casino share price lies within the reporting issues,” analyst Bruno Monteyne wrote in a Feb. 1 note.

Not everyone is so pessimistic on Casino, which operates the Monoprix and Franprix grocery chains.

“In the end, if you hold don’t get scared and understand the capital structure of the company, you stick around,” Clairinvest’s Valahu said.

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