Casino's Fightback Has Yet to Score a Knockout

(Bloomberg Opinion) -- Casino Guichard Perrachon SA is coming out fighting.

The company on Thursday announced plans to sell another 1 billion euros ($1.1 billion) of assets, and set ambitious sales targets in fast-growing areas of the retail market. A 1.5 billion euro disposal program has already been completed, cutting net debt in its French businesses by 1 billion euros.

It has also recognized that grocery is changing, and is consequently cutting its exposure to the hypermarket sector while increasing its position in premium and convenience food retail, organic products and online.

Casino and its Chief Executive Officer, Jean-Charles Naouri, deserve credit for tackling some of the issues that have been catnip to short-sellers. Although short interest remains at 16 percent, many investors have noticed the changes. The shares are up more than 20 percent this year.

Casino's Fightback Has Yet to Score a Knockout

But there’s an argument for caution.

The majority of the asset sales that have been completed so far have come from sale and lease back deals on store real estate, where a retailer sells property to a third party to raise cash, and then pays rent to occupy it. I’ve argued that this simply swaps one form of debt for another.

The next tranche of disposals could include non-core divisions, along the lines of Casino’s French contract catering business, which it agreed to sell recently. But more sale and leaseback deals are likely.

Casino argues that it won’t find itself stuck with high rents because it doesn’t sign the sort of very long leases that have proved to be a problem for some non-food retailers. It also points to expansion in businesses such as energy, data and online food retail to ensure it can meet these new payments.

Even so, the need to make rent payments puts the company in a more vulnerable position if the economy turns down. Meanwhile, the introduction of the IFRS 16 accounting standard will force it to recognize the liabilities on its balance sheets.

But the bigger issue is that, despite this progress, Casino remains subject to the convoluted corporate structure that has been a target for hedge funds.

Casino's Fightback Has Yet to Score a Knockout

The company is the main asset of Rallye SA, which has a 51 percent stake. The parent relies on dividends from the subsidiary to service its debt. Charles Allen, analyst at Bloomberg Intelligence, points out that Casino’s projection for French operating free cashflow of 500 million euros in 2019 will just about cover the 400 million euro dividend.

A cut would be wise, but this looks unlikely given the shareholding structure. Like Casino, Rallye has been taking steps to shore up its financial position and address its debt load. It assuaged some concerns on liquidity when it obtained a 500 million euro credit facility last September, and the sale of its Courir shoe business, announced in October, is useful. It was a good sign that about 1 billion of bonds falling due over the last six months were repaid. Still, Rallye has yet to create a long-term solution to its financial challenges.

Until then, Casino can stress its stronghold in organic food or its posh new urban supermarkets as much as it likes. Its investment case will be dominated by its ownership peculiarities. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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