Casino: the last dice of Jean-Charles Naouri?

London traders, at the heart of the European hedge fund industry, looked at their screens in disbelief. A bitter struggle that lasted for years between a seventy-year-old French retailer known for his bitter determination and a bunch of short sellers betting on the bankruptcy of his tightly interwoven companies seemed to end under their eyes.

Jean-Charles Naouri, managing director and majority shareholder of the supermarket giant Casino, whose stores include the high-end brand Monoprix and Franprix convenience stores, had warned six months earlier those who bet against the group that they "did it at their own risk".

But by the end of May, the shares of the parent company of the French retailer Rallye had fallen to a record high. There was growing fear that the precarious pile of debts on which Mr. Naouri had built his empire was on the verge of collapse – and that after three decades he was about to lose control of the group.

On May 23, even hard-core skeptics were caught unawares by what they saw on their screens: not only were Casino and Rallye shares suspended, transactions were also halted in the two parent companies listed on Mr. Naouri's purse. The trading rooms were filled with speculation that at least the 70-year-old would be forced to get rid of his heavily indebted group.

A hedge fund manager who had bet against Mr. Naouri said that it seemed like the group was about to collapse. "It's like this quote from Hemingway," he said. "How did you go bankrupt? Gradually, then suddenly. "

Yet Mr. Naouri was not bankrupt – he had another card to play. Frustrated by what he saw as a speculative attack on the group's securities by hedge funds, he began talks with the French commercial court to obtain authorization to open a creditor protection process. . It was an attempt to get a break from restructuring the parent company's net debt of more than 3 billion euros.

More than 12 hours after the suspension of the shares, the three public holdings and an additional private entity, Euris, through which the French controls Casino, announced their entry into the capital backup procedure, a process available to creditworthy companies in financial difficulty that allows them to continue their activities and keep their jobs while settling their debts. Meanwhile, Casino and its debts remain outside the backup.

The court froze the parent group's debt for 18 months and allowed Mr. Naouri to keep control.

The safeguard procedure was completed following a downward trend in Casino's share price over the last five years, while the food retail market had been disrupted by consumption habits and the rise of electronic commerce.

The restructuring is expected to result in heavy losses for Rally bond holders. Yet, for some punters against the group, this amounted to a payday. Several traders had bet on Rally's default on its debt, using derivatives called "credit default swaps", which were now guaranteed.

But those who were betting on Casino's actions were now facing a dilemma: was this the beginning of the end for Mr. Naouri in his battle to keep control of his retail empire? Or, by turning to the French court system favorable to the shareholders, had he once again shown temerity towards the opponents?

"This announces itself as the biggest battle of Naouri's history in the retail business," said Olivier Salomon, head of retail sales at AlixPartners consultant in Paris. "The challenge is to know if he can keep control of one of the oldest brands of French food distribution, which feeds about one-sixth of the country and is one of the biggest employers in the sector." private."

For Mr. Naouri, the safeguarding is the last dramatic turning point in a retail career that has included lawsuits, bitter takeover battles and hedge fund conflicts. Nevertheless, one thing remained constant: its use of debt and financial engineering to take control of badets.

Born in Algeria, Mr. Naouri arrived in France at the age of five. After a brilliant academic career – including a move to Ena, the training ground of the French political elite – he was, in the mid-1980s, the cabinet director of Socialist Finance Minister Pierre Bérégovoy. He left the government to join Rothschild & Co as managing partner and in 1987 he created his own fund, Euris, to make minority investments. This is the vehicle that he used to acquire the Rally Retailer, before merging with Casino.

The method used by Mr. Naouri to build his empire owes a lot to a financial engineering system called "Breton pulleys", designed by banker Antoine Bernheim of Lazard Frères for the French industrialist Vincent Bolloré. He played a decisive role in creating the fortune of a group of European billionaires, including the French Bernard Arnault and François Pinault.

The system creates a cascade of portfolio companies that allow the controlling shareholder to run an empire with a small down payment, essentially allowing maximum control of the company with minimal capital.

Mr. Naouri controls Casino through the intermediary of three listed holding companies: Rallye, Finatis and Foncière Euris. The holding companies each have their own debts, which are based on the Casino dividends that are paid into the chain of companies in order to meet their obligations to the lenders. In practice, this means that Mr Naouri controls Casino, which represents a market value of 3.6 billion euros, through a stake of about 100 million euros. in the upper layer of the group.

Few people questioned the structure while Casino was working well, as Mr. Naouri launched a series of urgent calls to the retail sector. He was one of the first to realize that changing consumer habits would mean a drop in the demand for "all under one roof" hypermarkets and a reduction in Casino exposure. .

Instead, he positioned the group in convenience stores and discount stores by taking control of Franprix and Leader Price in 2009, then securing Monoprix in 2012. Very early in the E-commerce, he bought the online retailer Cdiscount in 2000 and focused Casino's portfolio on the online market. Three of the richest regions in France: Greater Paris, Greater Lyon and Côte d'Azur. "Casino has the best portfolio of French retail badets," says an industry consultant.

But while others who used similar corporate structures were focusing on high-margin industries, notably Mr. Arnault with his LVMH luxury empire and Mr. Pinault, who had begun to reposition himself away from the retail trade in luxury, Mr. Naouri remained in the retail business.

A fund manager betting on Casino's shares said Naouri was the smartest financial architect in France, but his "big mistake" was to get into mbad distribution. "If it was launched in luxury, it would be richer than Arnault or Pinault," he says.

A senior banker said that unlike MM. Arnault and Pinault, "Naouri may have made the following mistake: he did not repay the debt when he could have done so. It doubled to buy Latin America, then there was a slowdown in the region and broader concerns about the retail sector. "

The acquisition by Casino de Grupo Pão de Açúcar, Brazil's largest supermarket chain – borrowing hundreds of millions of euros – was followed by a recession that lasted two years. At home, Casino has been subjected to additional pressures, related to the growing threat of Amazon and the arrival of German discounters Aldi and Lidl, resulting in a drop in the price of its action and that of its competitor Carrefour.

In addition to these sectoral pressures, Casino has had to face its own challenge: its complex structure and its high debt level, a legacy of Mr Naouri's building of the empire.

The structure initially boosted the control of the group by Mr. Naouri. But the layers of leverage meant that as stock prices fell, the debt of his empire seemed viable. The short sellers then targeted Casino's shares, believing that paying off their parents' debts through dividends was a burden on the group.

"If the price of the Casino share had not fallen in the same way, the debt would be viable," says a consultant. "Without the problem of stock prices, you do not have a debt problem."

The next morning of Casino parent companies announced the backup procedure, the retailer's shares surged. An badyst called this a "first victory" for Naouri. Much more favorable to the shareholders than a complete bankruptcy, the guarantee gives the shareholders a veto right over the projects presented to the court. Most importantly, it allows Mr. Naouri to retain control of the group while entering into an agreement to extend his debt.

Casino insisted that the problems of its heavily indebted owners would have no impact on the stability of the retailer, which recorded a commercial profit of 1.2 billion euros in 2018. Senior executives wanted to rebadure shareholders on the fact that the backup process presented a new disadvantage. meant that the banks would not be able to seize the Casino shares from Mr. Naouri, even though almost all of its interest had been pledged as collateral to the banks.

Yet just two months later, there is nervousness in the credit markets. The cost of buying derivative instruments, which protects against losses incurred in case of failure of Casino's bonds for a year, has quadrupled. Casino's credit default swap curve has now been reversed – a serious price dislocation that occurs when traders rush to place bets on a company that they believe may collapse earlier than planned.

One of the consequences of the backup is that Casino has lost access to short-term financing markets. The so-called commercial paper market – a type of debt typically contracted for six to nine months – is now closed to the retailer, whose commercial paper balance has risen from 450 to 60 million euros since the filing of the incapable of continuing to find willing buyers of its debt.

To close this gap, Casino had to align with its credit lines with banks, which has potentially increased tensions with many of the same lenders involved in the debt negotiations of more than 3 billion euros of Rally.

"Just like Rallye [last year]Casino must use its lines of credit because it can no longer issue bonds or use commercial paper, "says Fabienne Caron, an badyst at broker Kepler Cheuvreux.

Despite the badurances given previously, one of Mr. Naouri's lenders has already broken ranks and called as collateral. In a ruling in July, a French court ruled that Société Générale could pledge 25 million Rallye shares, as derivative products used to finance it do not fall within the safeguarding process.

Under pressure from the French regulator, Casino revealed that nearly 9% of its shares had pledged as collateral for € 231m of similar financial badets.

Casino insists that the move of Société Générale was unique. Deutsche Bank's badysis shows that even if all the collateral owners in the different companies of Mr Naouri exercise their rights, it would not be enough for him to lose control of the group.

Last Thursday, Casino announced new measures to reduce its debt. He announced that he would abolish his dividend for the next 18 months, which would save 500 million euros, and confirmed having sold 2.1 billion euros in sales. badets under a plan to divest non – core badets of 2.5 billion euros. Although well received by badysts, there are still problems with Casino's ability to generate free cash flow in its home market, which accounts for about half of its sales.

So far, Mr. Naouri has opposed the sale of Casino's "crown jewels", namely Franprix or Monoprix, which would significantly reduce his debt. A simplification of Casino's operations in Latin America, approved last week, could allow it to sell all or part of its operations in Latin America. And the prospect of a single decisive blow – such as a merger with Carrefour – is considered by some as the best solution, even if it would face serious regulatory hurdles.

The implementation of the guarantee and the disposal of Casino's dividend have allowed Mr. Naouri to have time to renegotiate the group's credit lines and to try to increase his profitability. But it must still rebadure the credit market and cope with the wider pressure in a low-growth sector where there is no easy gain.

Casino lenders, for their part, find themselves in a Catch-22. Turning their backs on Mr. Naouri and calling their warranties would leave the group with no rulers and they reluctantly acknowledge that he is likely to be the best person to improve Casino's profitability – or find a buyer for the retailer. However, they face the unattractive prospect of a long battle, in which the payment of the group's debt could be delayed by a decade.

"The banks want to ensure that Casino's operations are not affected by what's going on," says a person involved in the negotiations with the banks. "A consensual agreement is better than fighting with him – for everyone. Whether we support the backup or not, we have to live with it. "