MAKOR WHAT’S NEW
Yesterday evening Tuesday 12, Carrefour confirmed that the company has received a preliminary friendly proposal from Couche Tard and this morning, per Bloomberg news, the potential acquiror was mentioned to discuss about a EUR20 offer with room for price negotiations (this would represents a 42% premium from CA FP last closing price).
Carrefour is one of the world’s leading food retailers and operates different stores format (Hyper/Super markets, convenience stores, cash & carry , e-commerce) in France (21.2% market share) but also in Belgium, Spain, Italy, Poland Romania, Argentina, Brazil and Taiwan. Couche Tard is the leader convenience store industry in Canada and one of the largest in the US. In Europe, Couche Tard is a leader in convenience store and road transportation fuel retail in Scandinavia (Norway, Sweden and Denmark), in Baltic countries (Estonia, Latvia, Lithuania and Poland) and in Ireland.
MAKOR COMMENTS
Since Mr Bompard took the helm at Carrefour in 2017 after having been successful with the Fnac-Darty combination, the CEO engaged Carrefour on a massive restructuration specially in France with the goal to refocus Carrefour on its clients. He also sold non-strategic assets around the world but in the same time reinforced Carrefour positions in some of its main operating countries (Spain, Italy). His strategy has allowed the company to become N1 or N2 in all its countries despite strong competition thanks to developing new format (moving from hypermarkets/supermarkets model out of the cities to a more balanced one with the opening of inside/local smallest store) and the nomination of a new CEO for France business Mid 2020 to implement and speed up the restructuration. If for now Mr Bompard has been successful in its cost cutting/restructuring plan,, the company still struggle to improve significantly its FCF generation from operations that started in 2020 and clearly represents the main objective for 2021 that could boost Carrefour valuation.
At first glance, the deal would allow Couche-Tard to diversify its activities being less reliant on Fuel stations (that are supposed to be less attractive due to electrification vehicles) and also expands its geographic footprint by adding West Europe, Asia and LaTam to its portfolio but we don’t see a specific strategic fit.
We do have a SOTP model for Carrefour giving a EUR20 valuation in line with the price mentioned. Without taking any specific view on how the transaction could be structure eg full cash financed by equity issuance or adding subsidiary stock offer, Couche-Tard management would have to :
- Convince the French Government and Unions and give strong commitments in terms of employment (as far as there is no overlap between the companies, this should be easily resolved) and of French products suppliers (Carrefour is one of the big partner of French producers)
- Convince the 3 main shareholders holding roughly 20% of Carrefour to adhere to the project (GalFa, Mr Diniz from Brazil and Mr Arnault) and tender their shares either for cash or exchange shares.
- Make sure that all parties involved (Unions, shareholders, business Partners) will support the offer.
MAKOR CONCLUSION
For the time being, the French AMF has not placed Carrefour in pre-offer situation and it remains to be seen when & if a formal offer could be presented.
If the offer materializes at EUR20, we view the anti-trust risk very low (only overlap is in Poland) and we would use a late Q3 / early Q4 closing (approvals from antitrust authorities, French Banking regulator/ECB, French Government). We see an upside to EUR20/22 and limited downside especially if FCF generation improves in 2021 (FY 20 results should be published February 26).
We think the downside in Carrefour price is limited and would therefore recommend investors to set up positions.