{http://www.muddywatersresearch.com/research/co/mw-is-short-groupe-casino/}
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.