If there was a textbook way to fend off an assault from a short seller, Casino's reaction over the past three months would hardly be it.
The French grocer is under attack from Carson Block's Muddy Waters. The short-seller contends that Casino is using financial engineering to mask a deterioration in its core French retail business, and that shareholder Rallye (a holding company controlled by Casino's chairman, Jean-Charles Naouri) has too much debt, and depends on Casino's dividend stream to make interest payments. The retailer has dismissed these allegations.
Yet, on Monday, Standard and Poor's cut Casino's rating to junk.
The downgrade follows Casino's announcement earlier this month of a 35 per cent drop in annual profit to €1.45 billion ($1.6 billion) as its Brazilian business was squeezed by rising prices and weak sales growth. The retailer had already warned in January that 2015 earnings would be lower than analyst estimates, a move that had sent the shares to the lowest in more than two decades.
So in a way, S&P is just catching up. It's still unhelpful, though not terminal.
The downgrade will only increase the cost of servicing the company's bond debt by less than €20 million (before tax) this year, according to the retailer. Next year, that figure will rise to €70 million. That's a fraction of Casino's €838 million of cash flow from its French operations alone.
To reduce its €6.1 billion of net debt, Casino is racing to raise €4 billion by selling some of its most profitable businesses, including its grocery operations in Thailand and Vietnam.
While the disposal makes sense, divesting these businesses will make Casino even more reliant on France and its problematic Brazilian operation.
Casino said on Monday the situation in Brazil is stabilizing, and it expects EBITDA at its French unit to rise 24 per cent to €900 million in 2016. Casino is confident of meeting that target – but it looks optimistic given the stiff competition the retailer faces in that market.
For now, investors look to be giving the company the benefit of the doubt. The stock has risen 15 per cent since Muddy Waters' report in December, which the grocer claims justifies its defense. At 6 per cent its dividend yield is still more than twice the average.
That should buy Casino some more time. But in the face of Muddy Waters' attack, it can't afford any more earnings disappointments or ratings downgrades.
News by Bloomberg, edited by ESM. To subscribe to ESM: The European Supermarket Magazine, click here.