Muddy Waters questioned publicly the reported group cash-flow and solvability of listed companies Rallye and Casino. Proxinvest investigated and found that by failing to disclose the extent of several intragroup links through subisdiaries and extended personal direct involvement at various level of this public group, Jean- Charles Naouri is reducing the potential wealth generation for other shareholders and puts these companies at risk. Following the Muddy Waters December 2015 alert on the French Rallye Casino retail group Proxinvest has completed a review of its governance and of its financials.
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Was Muddy Waters right on the Rallye-Casino group?
Famed short-seller Carson Block, director of research at Muddy Waters Capital (MWC) put Casino Group (Casino) on his radar following the release of his report on December 17, 2015 in which he condemned the company’s management for misleading investors.
The MWC thesis was that the EBITDA figures reported by Casino were inflated by almost 100% thanks to a combination of creative accounting and the frequent use of real-estate sales. It further asserted that the company was engaging in asset sales and intragroup ‘restructurings’ to force cash upstream in the form of dividends in an attempt to save its largest shareholder, Jean-Charles Naouri’s Group, from bankruptcy.
Given that Mr. Block was calling for a further 82% collapse in the Casino share price to €6.9, a total collapse to zero of the mother company Rallye, further a downgrading to come of the companies’ debt and finally a bankruptcy of Rallye by 2017 , a closer look at the financials is warranted.
Markets reacted almost immediately and by the time Casino drafted its response on December 21, 2015, shares had already plummeted 13%. By mid-January, Casino was back in the news again this time announcing that it plans to sell its Vietnam unit in H1 2016 and that buyers have expressed interest in its majority stake in Thai hypermarket operator Big C Supercentre, estimated at €2.6 billion. Actually the Big C sales was a success at € 3.1 million, but despite of this positive news, Standard & Poors maintained its BBB rating under negative watch.
As of February 12, 2016, Casino shares are trading at €40, down 20% from mid-December and Rallye at 12€ or 30% from mid-December.
Proxinvest has reviewed in depth the governance and financial structure of this complex group aiming to determine whether an inherent lack of transparency has masked potential behaviour carried out to the detriment of minority shareholders.
In the Poxinvest’s judgment presented in a documented special report published today, the Rallye-Casino group practice for the control on related party transactions have become in the last years exceptionally permissive and appears at various level of the group in breach with the applicable regulation. While the group has increased the number of its controlled subsidiaries likely to enter into undisclosed related party agreements, its auditors’ and shareholders control over the special reports on related party transactions and its vote by the shareholders appears to have deteriorated and generate a serious risk for shareholdesr and lenders.
February 22. 2016
