Asked what made his job difficult, British prime minister Harold Macmillan replied: “Events, dear boy, events.” Carrefour would sympathise. Just as the French retailer starts the process of listing its Brazilian unit, the country has sunk into political crisis.
Carrefour has been planning an IPO of Atacadão, a holding company for its Brazil interests, for some time. It will give the unit access to sources of capital beyond the parent company, a more local flavour and provide liquidity for its partner.
There is another attraction: a re-rating. Carrefour’s enterprise value is around 6.7 times earnings before interest, tax, depreciation and amortisation forecast, a multiple that reflects the slow growth in its mature home market. Companhia Brasileira de Distribucao, a retailer part-owned by Carrefour’s French rival Casino, trades at 13 times 2016 ebitda.
That partly reflects CBD’s depressed earnings last year. But even applying CBD’s more modest forward multiple of eight times to Atacadão’s 2016 adjusted ebitda of €924m implies an enterprise value of over €7bn. One could even make the case that Atacadão should be valued at a premium to CBD, given that its profits have held up better during Brazil’s recent economic troubles.
Market volatility — the Bovespa index is down 8 per cent since allegations of corruption against President Temer — may rule out a premium valuation. Even so, Carrefour’s 88 per cent stake in Atacadão could be worth proportionately more than its 24 per cent contribution to earnings. Listing it will make valuing Carrefour easier.
What it would not do is fix structural issues in Carrefour’s home market, which still produces almost half of operating profit. It has been spending heavily on convenience stores and online to reduce its dependence on giant hypermarkets, a format that is out of favour with French shoppers.
This will require investment; having already refurbished its hypermarket estate, the company now plans to spend €2.3bn a year on convenience and IT in the medium term. That contrasts with UK operators such as Tesco, who were quicker into alternative formats. They are now seeing capex tail off and free cash flow start to improve.
One other thing: Carrefour needs a new chief executive to replace Georges Plassat, who leaves next year. “Events” in Brazil are the least of its worries.
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