Tags: Carrefour | retail | revival | europe

Carrefour Faces Tough Choices to Fund Revival

Wednesday, 22 August 2012 09:48 AM

World No.2 retailer Carrefour may need to raise up to 3 billion euros ($3.7 billion) to fund a revival plan for its struggling European hypermarkets, but tight finances and dire economic times leave its new boss with hard choices.

Having pulled out of recession-hit Greece in June, Carrefour could quit more non-strategic countries such as Turkey, Indonesia or Poland to free up cash.

But in tough times, disposals could take too long, so CEO Georges Plassat could be weighing alternative solutions to fund a turnaround, such as a partial listing of its emerging-market businesses, notably profitable Latin America.

"Restructuring the group will be an extremely challenging and costly process," Natixis analyst Pierre-Edouard Boudot said. "Carrefour's finances are already stretched, so the turnaround plan will have to be financed using outside resources."

Carrefour declined to comment.

Plassat took over in May with a brief to reverse years of underperformance in Carrefour's European markets. He is expected to detail his recovery plan on Aug. 30 with first-half results.

The retail veteran has said he needs three years to turn around Carrefour, whose challenges include halting a fall in market share in France, where it makes 43 percent of sales, cutting debt and weathering a difficult economic climate in Italy and Spain, where it makes just under 20 percent.

Plassat's arrival has raised hopes that Carrefour's hypermarket format, which has been hit by competition from specialist stores and online shopping, will survive.

Since July 12, when Carrefour defied fears of another profit warning, saying it was comfortable with the market consensus for 2012 operating profit, the stock has risen 26 percent from 18-year lows, outperforming a 9.5 percent gain in the European retail sector.


Limited cash and high debt levels are complicating his task.

"Carrefour needs cash now and must act quickly," said Milos Ryba, an analyst at research firm PlanetRetail."

Carrefour burnt a lot of cash last year as capital expenditure rose 27 percent and profit slumped 19 percent. Free cash flow sank to 77 million euros from 839 million in 2010, leaving it with net debt of about 7 billion euros at year-end.

In March, Moody's, Standard & Poor's and Fitch cut their credit ratings on Carrefour in view of additional pressure on the balance sheet.

To preserve cash, Carrefour halved its dividend, and former CEO Lars Olofsson halted his brainchild Planet project, the costly revamp of its European hypermarkets.

This cut capital spending to 1.6-1.7 billion euros for this year, or 2 percent of sales, a level analysts say barely covers the cost of maintaining existing stores. French rival Casino, by contrast, is expected to spend 3.5 percent of sales on capex, and estimates for Tesco, the world's third-largest retailer, run higher still, at 4-4.5 percent.

Plassat told shareholders in June that while Planet was dead, some European hypermarkets still needed renovation. His challenge is to find the extra cash needed for that task while also reducing debt.

"It will cost between 600 million and 1 billion euros to renovate the store network," said Boudot at Natixis, who estimates that 395 hypermarkets in Europe still need renovation. He said Carrefour would also have to reinvest in cutting prices, at least in France, at a cost of 400 million to 1.1 billion.

Oddo Securities analysts said Carrefour would have to spend about 3 billion euros to cover maintenance and expansion.

In June, Plassat hinted at further cost savings, saying overhead and advertising costs were too high.

Nomura analysts expect Carrefour to target 1-2 billion euros of savings over two to three years and reinvest these mainly in closing the price gap of 3-4 percent with French rival Leclerc.


In recent years, Carrefour has abandoned several countries including Japan, Mexico, Russia and Thailand.

Plassat has made clear Carrefour will stay in Brazil and China, but analysts expect disposals in Indonesia, Turkey, Poland, Romania, Malaysia, Taiwan and Singapore to follow, with proceeds between 1 and 3 billion euros.

Britain's Tesco, France's Auchan and U.S. giant Wal-Mart are seen as potential buyers of eastern Europe assets.

"Its central and eastern European assets could represent a great opportunity for Auchan, an operator who is well established in Russia, Poland and Romania," Ryba said.

Carrefour will not be alone in offloading assets, however, as German retailer Metro's Real may look to sell some eastern European businesses, analysts added.

In Indonesia, CT Corp., a conglomerate with banking and media interests, told Reuters in July it was in talks with Carrefour about raising its stake in its unit there.

In Turkey, the situation is less clear. Carrefour said in July that it was reviewing the "strategic future" of its local joint venture with Turkish partner Sabanci Holding after its chairman and three other board members quit.

Sabanci is seen as the only potential buyer, and it is unclear whether it has the funds to buy Carrefour's stake, analysts said.

Because these disposals could take time, Carrefour may look for other alternatives.

Activist shareholder Knight Vinke, owner of a 1.5 percent stake, in June suggested listing Carrefour's international business to raise cash.

This option might make sense for Carrefour's assets in Latin America and China, Boudot said. Listing 20 percent of its Latin American assets could raise more than 2 billion euros and 20 percent of China 675 million, based on a multiple of 11 times estimated 2012 EBITDA, in line with average multiples for Latin America and Asia.

The IPO of China's Sun Art Retail Group, a joint venture between Taiwan's Ruentex Group and Auchan, raised $1.1 billion in Hong Kong last year.

Latin America prospects may be particularly attractive, with UBS analysts predicting compound average growth of 9 percent for sales and 12.5 percent for operating profit between 2012 and 2015.

Brazil alone, where Carrefour is No. 2 in a dynamic food retail market, would be a good candidate for a listing.

"Carrefour could sell non-strategic or underperforming assets for more than 1.3 billion euros, while the flotation of a 25 percent stake of Carrefour Brazil would enable the group to raise 1.2 billion euros," Barclays analysts said in a note.

A capital hike seems unlikely, given Carrefour's low share price, but if the asset sale and IPO options take too long, it could be an option to raise cash quickly, analysts said.

It would, however, likely put Plassat on a collision course with top shareholder Blue Capital, which is an alliance of France's richest man, Bernard Arnault, and U.S. private equity group Colony Capital. Blue Capital declined to comment.

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Wednesday, 22 August 2012 09:48 AM
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