The Hedge Fund Lawyer Annoying France’s Cozy Corporate World

(Bloomberg) -- Sophie Vermeille is on a crusade against France’s establishment. You won’t find her in a yellow vest, though. Hers is in the boardroom, and her supporters are hardly those who would take to the streets.

The Paris-based lawyer has been engaged in a tussle with Jean-Charles Naouri, chief executive officer of Casino Guichard-Perrachon SA, over his control of the French retailer. Hired by unidentified investors, Vermeille aims to put Casino at the mercy of the free market and help hedge funds shorting its stock to profit.

The argument involves complicated accounting and shareholding practices, but it’s still managed to capture the attention of a French financial world that often has an uneasy relationship with U.S.-style capitalism. Casino remains among the most-shorted companies in Europe and the public spat doesn’t seem to be going away.

The head of the French Market Authority, Robert Ophele, said in a television interview broadcast on Jan. 21 that the regulator is looking at whether Casino’s financial information is correct and timely as well as investigating information from short-sellers. Last week, analysts at brokerage Sanford C. Bernstein, who have been critical of Casino, published a report including a summary of some of Vermeille’s work on debt restructuring.

“The battle between Vermeille and Naouri is an illustration of the process French markets are going through,” said Nicolas Veron, a senior economist at Bruegel and the Peterson Institute for International Economics who also advises a think tank founded by Vermeille. “They’re on a slow and tortuous path to free-market capitalism and it’s a struggle.”

Vermeille, 38, alleges that Naouri, 69, is acting against the company’s best interests. His control resides in a complex structure of holding companies that short-sellers say are worthless and depend on payments from Casino to stay afloat. The most indebted of them is Rallye SA. Spokesmen for Casino and Rallye declined to comment for this article, as did Naouri.

The public spat started late last year when Vermeille wrote open letters and published reports claiming that French regulators were allowing questionable accounting at Rallye to help Naouri keep control of Casino. The hedge funds Vermeille represents are trying to make money from betting on a decline in the value of the stocks and bonds of Casino and Rallye.

Casino and Rallye filed a complaint in October with French prosecutors that alleged hedge funds were spreading false information to push down the companies’ share prices. Rallye has said it’s been conforming to the same accounting standards since 1992, the year that Naouri became Casino’s largest shareholder.

Ophele, the regulator, said in a November interview with Les Echos newspaper that Rallye didn’t change its accounting criteria, refuting one of Vermeille’s main arguments. His office declined to comment for this article.

In a separate action, the group also won a court ruling to get Vermeille to take down her website, putting her on the back foot.

The odds are against Vermeille. Naouri is one of France’s most prominent businessmen and has links to a who’s who of the country’s investment bankers and political and corporate dynasties. His name sits comfortably alongside those of fashion giant Kering SA’s Francois Pinault and Vivendi SA’s Vincent Bollore, stalwarts of French business who built corporate empires thanks to generous support of local banks and tight relationships with government.

“I am trying to make France a more transparent financial market, truly open to anyone, and not just for family and friends,” Vermeille said in an interview in Paris in November.

Casino’s shares are up 66 percent from the 22-year low they reached last year after the company met its target to sell 1.5 billion euros ($1.7 billion) of assets to reduce debt. A new credit facility, meanwhile, diminished the threat of a default at Rallye and steps to simplify Casino’s international structure may also make it easier to refinance its holding company debt. Casino is also on track to boost its earnings this year.

Rallye is likely to use credit lines to repay 300 million euros of bonds in March. The same month, auditors are due to sign off on the holding company’s financial report in a move that could dispel doubt over how it accounts for its stake in Casino.

“As an individual, Vermeille has much less influence than Naouri,” said Anthony Giret, an analyst at Spread Research in Lyon. “She will try to apply pressure but in the end, the power isn’t in her hands.”

Vermeille’s strategy is to make noise about how French financial markets are parochial and skewed towards controlling shareholders. Her opponents say all she’s doing is exposing the evils of the Anglo-Saxon finance model and London- and New York-based short-sellers. Some commentators in the French media have questioned whether foreign hedge funds should be allowed to deal such public blows to a French company.

France doesn’t have many home-grown hedge funds and domestic market authorities have historically sided with business owners against public investors. But that doesn’t mean regulators are weaker than in other countries, even if France’s corporate ownership structure allows controlling shareholders to wield more power, said Bob Hancke, associate professor of political economy at the London School of Economics.

“It’s hardly surprising that stakeholders fight for their, well, stake,” said Hancke. “I am also not entirely sure to what extent short-sellers have a social function.”

Casino is important to France. Successfully weathering challenges from online shopping and discounters, the group employs more than 200,000 people worldwide and has 12,000 stores. Its chains include Monoprix.

Naouri has surrounded himself with a network of contacts. On the Casino board he sits alongside Baron David de Rothschild, former head of the investment bank where Naouri was a managing partner 30 years ago. Another director, Henri Giscard d’Estaing, is the son of a former French president. Antoine Giscard d’Estaing, also a member of the dynasty, served as Casino’s finance chief until late last year.

In September, a group of five banks granted Rallye a 500 million-euro facility just after Casino’s shares had been trading at their lowest for more than two decades.

“Naouri is very resourceful,” said Georges Gedeon, the founder of London-based hedge fund Antler Capital Partners, which doesn’t have any positions in Casino or Rallye. “He’s capable of finding solutions like the way he got the French banks to help him out.”

That said, times are changing, according to Gedeon. “What worked 10 years ago doesn’t work anymore,” he said. “There’s more corporate governance and more U.K. and U.S. institutions involved in the capital of French companies. It’s more and more difficult for a guy like Naouri to thrive in this environment.”

For Vermeille, who has experience in restructuring at U.K. and U.S. law firms including Clifford Chance and DLA Piper, the new credit line was a sign that the situation had gone too far and it was what drove her to represent the funds. Her campaign isn’t a personal vendetta, she said. It represents issues that have been close to her for years and led her to start a pro-market think tank, Droit & Croissance, or Rules for Growth, in 2012.

Vermeille, as head of the think tank, said she helped advisers to Emmanuel Macron on insolvency law reform before the then economy minister became president. Still, now she’s advising officials on new reforms to spur competition for French businesses, though she’s given up her role as the think tank’s chair in order to represent the funds.

“There’s a long tradition of French governments getting involved in troubled companies,” she said. “I hope that this time, as we face serious challenges considering the level of debts of large companies, the government will understand the benefits of a more neutral approach for financial markets and companies.”

--With assistance from Gaspard Sebag, Angeline Benoit and Abigail Moses.

To contact the editor responsible for this story: Rodney Jefferson at r.jefferson@bloomberg.net

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