It is necessary to solve Carrefour's structural problems in its domestic market, as that continues to generate almost half of the operating profit.
When asked about what hindered his work, British Prime Minister Harold Macmillan replied: "Events, dear boy, events." Carrefour would agree. Just as the French retailer was beginning the process to put its Brazilian subsidiary in the stock market, the country plunged into a political crisis.
Carrefour had been planning an initial public offering (IPO) of Atacadao, a holding company that encompasses its interests in Brazil. This will give the subsidiary access to sources of capital outside the parent company, a bigger local touch, and provide liquidity to its partner.
There is another attraction: a rating review. Carrefour's company value amounts to about 6.7 times the forecasts of earnings before interest, taxes depreciation, and amortization, a multiple that reflects the slow growth in its domestic market. Companhia Brasileira de Distribuçao, a distribution company partly owned by Casino, the French rival of Carrefour, is trading at 13 times the ebitda of 2016.
This partially reflects the low benefits of CBD last year. However, even applying CBD's most modest expected multiple: eight times Atacadão's adjusted ebitda in 2016, i.e. 924 million euro, the value of the company would amount to some 7,000 million euro. It could be argued that Atacadão should be valued with a premium over CBD, bearing in mind that its benefits have better weathered Brazil's recent economic problems.
A high valuation can be ruled out due to the market's volatility, as the Bovespa index has fallen 8% since President Temer has been accused of corruption. Nevertheless, Carrefour's 88% participation in Atacadao could be worth more in proportion than its 24% contribution to the benefits. Its quotation will facilitate valuing Carrefour.
However, it wouldn't solve Carrefour's structural problems in the national domestic market, as it continues to generate almost half of its operating profit there. It has spent heavily on convenience stores and on its web site to reduce its dependency on giant hypermarkets, a format that is losing appeal to French buyers.
Now, after the renewal of its hypermarkets, the company plans to spend 2.3 billion euro annually in the medium term in convenience stores and on the Internet. This contrasts with British operators such as Tesco, who opted to look for alternative formats. Now they see how capital spending decreases and free cash flow starts to improve.
Moreover, Carrefour needs a new Chief Executive to replace Georges Plassat, who is leaving the company next year. The events in Brazil are the least of their concerns.
Source: Expansión