Muddy Waters Research is short Groupe Casino and the stock is crashing. Below is their full report on the company and interview this morning with Bloomberg
Groupe Casino report
Groupe Casino (CO FP) is one of the most overvalued and misunderstood companies we have ever come across. The basic problem with Casino is that its financial statements are literally meaningless to understanding the company’s (poor) health. They do not distinguish between what Casino owns and what it owes. (Spoiler: we estimate Casino’s LTM leverage ratio at 8.9x.)
Casino’s controlling shareholder Jean-Charles Naouri is a genius. He won first prizes in France’s high school Latin and Greek exams, completed his baccalaureate degree at 15, and earned a PhD in math in only one year. Like the geniuses who founded the hedge fund Long-Term Capital Management, which spectacularly collapsed, Mr. Naouri has an affinity for leverage. One would expect Casino to be a relatively boring hypermarket retailer; however, together with its parent, Rallye SA (RAL FP), Casino increasingly resembles a highly levered hedge fund. One example is Casino’s total return swaps on listed equities, which we estimate have a mark-to-market loss of approximately €500 million.
Casino and Rallye are now experiencing their version of a “six sigma event”, with emerging markets (80% of consolidated EBITDA) unwinding, currencies selling-off, and a sharply deteriorating core business. Casino obfuscates these problems by (i) adding complexity to its already convoluted structure and financials, (ii) engaging in financial engineering to improve the optics of its financials, and (iii) by hollowing out the productive value of the businesses in order to keep Rallye from collapsing.
Our report peels away many layers of the onion to show that Casino is dangerously leveraged, and is being managed for the very short-term. We explain that Casino’s shares are worth as little as €6.91, and correspondingly, the shares of Rallye are likely going to zero. If Casino trades at our estimated value of €6.91, the recovery on Rallye’s bonds should be about €0.15.
We are short shares of France-based retail conglomerate Casino (CO FP) because their value could be as little as €6.91 per share, which is 86.2% lower than its last close. We are short Casino’s credit, which S&P rates BBB-, because we estimate Casino’s LTM adjusted leverage is 8.9x, and the parent has €3.3 billion in maturities coming due through 2017. 2 We are short shares of Casino’s parent and largest shareholder Rallye SA (RAL FP) because we value them at zero. We are short the credit of Rallye because we consider a default probable in the next two years. Our base case value for Casino shares is €6.91. This is based on estimates of LTM numbers. Casino’s financial statements greatly mislead investors about the value of Casino’s equity.
Casino management then obfuscates and refuses to release key clarifying information, thereby continuing the misperception of value that is clear to insiders. On the surface, Casino appears to be prudently managed with moderate leverage (net debt to EBITDA) of only 3.0x. Unfortunately, Casino shareholders have far less cash and cash flow to meet those obligations than it appears. Casino has only fractional ownership in a number of businesses that it fully consolidates.
That is, even though Casino only owns portions of these businesses – in one case only 14.2% – Casino reports their results as though they were its own. Casino then borrows against these numbers. The concept is similar to a trustee of someone else’s trust taking the trust’s account statements to the bank and getting a loan based on the assets. (The trustee would obviously be acting illegally; Casino’s accounting is legal.) We estimate Casino’s LTM leverage ratio is 8.9x.3 Ideally, a company consolidating results of proportionally-owned companies has the debt spread out among the consolidated companies.
That is not the case with Casino – there is a massive gap between what is owned, and what is owed. Casino owns only 49% of the estimated LTM EBITDA, but owes 93% of adjusted net debt. Casino’s leverage, compounded by the massive debt at its parent, RAL, is causing management to hollow out the productive value of Casino. Even though Casino realized €1.7 billion by cramming an abusive transaction down the throats of one of the companies it consolidates, Almacenes Exito SA, parent-level and consolidated cash have both dropped precipitously while debt has climbed. Casino’s consolidated subsidiary GPA is one of the largest tax dodgers in Brazil, according to the government’s official list. Casino guarantees this liability for up to €3 billion. (Our debt and leverage calculations do not include this contingent liability.)
Groupe Casino full report below
Groupe Casino MW_CO_12162015
Muddy Waters founder Carson Block has announced his latest short target, betting against France’s Casino Guichard, accusing the company of using financial engineering and legal accounting tricks. Bloomberg’s Matt Miller reports on “Bloomberg ‹GO›.” (Source: Bloomberg)