Rallye SA (ISIN FR0000060618) – another Holding company at a discount ?

Rallye SA, France is the holding company for 49.97% of Casino Guichard, one of the big French retail chains.

In their annual report they present the company as follows:

Their major assets are:

– 49.93% of Casino Guichard Perrachon SA (ISIN FR0000125585)shares (61.24% of voting rights)
– 72.86% of Groupe Go Sport SA (ISIN FR0000072456)(78.73% of voting rights), another small listed French company
– “investment portfolio”.

There is some qualitative description of the “investment portfolio” on page 19 of the report, it seems to be a quite divers collection of participations and real estate.

Rallye’s investment portfolio was valued at €365 million as of December 31, 2011, compared to €435 million as of December 31,
2010. At the end of 2011, the portfolio consisted of financial investments with a market value(1) of €272 million (vs. €295 million
at end-2010) and real estate developments measured at historical cost(2) of €93 million (vs. €140 million at the end of 2010).

Net external debt stands at 3 bn as of year end 2011. Other than that i did not see major positions.

The trickiest part of Rallye’s balance sheet is the 2.5 bn EUR receivables position the show in their single entity balance sheet.^2.3 bn of that seem to be receivables against Group companies:

The current account advances made by Rallye to its subsidiaries are part of the Group’s centralized cash management system. They are
due within one year.

The point I am struggling with most is the following:

If those receivables are against Casino, then one would add those assets for the Rallye evaluation. If those receivables are against their various subholdings which also hold Casino shares, then one would need to fully eliminate them.

I have quickly checked the 2011 Casino annual report, but didn’t find any liability against Rally SA. So we should assume that those internal Rallye receivables are a technical position which is financing the Casino stack and should therefore not be counted extra. Only the “external” part (~200 mn) should be used).

So with that assumption we can now calculate the “sum of part” or intrinsic value of the Rallye SA share:

EUR mn
Casino Guichard (50%) 4,112.3
Group Go 34.8
Investment Portfolio 365.0
Receivables, other assets 220.0
Sum assets 4,732.1
   
Debt -3,000.0
Other liabilites -110.0
Net Assets at market 1,622.1
   
 
Number of shares 47.2
Value per share 34.37
 
Current market price: 25.80
“Discount” 24.9%

Overall, a 25% “discount” seems to be quite normal for such a slightly in transparent structure including extra financial debt. However if one thinks Casino is a great investment, then investing through Rallye might be a good idea:

Casino Guichard itself is not uninteresting. Although it is not cheap, they are growing pretty strongly. Especially interesting is the fact that 60% or more of their sales are now in LatAm (Brazil and Colombia), two markets which seem to be the most interesting retail markets at the moment.

On the other hand, I am not a big expert on retail chains, so from that point of view I will not analyze Rally/Casino further.

Summary:

If my assumptions are correct, the current “discount” of Rallye vs. its sum-of-parts as a holding of 50% Casino Guichard is only 25%. Considering the extra leverage and the lack of visibility, it does not look greatly undervalued.

11 comments

  • good point.

    it is hard to know what their motives are, but in the very long-term it could be argued that once casino balance sheet is de-levered, Casino could eventually buyback rallye shares or vice versa therefore collapsing the structure. this would also help from a deductibility of interest perspective, as from my understanding there could also be a potential tax shield if the debt was in Casino instead of Rallye..

    I agree that the leverage is significant, but as long as you have a positive view on Casino (can be hard for some considering the declingin French business), I think it is actually managable. Take for example the 1.5bn in bonds that can be refinanced from 2014 at lower rates and the ample available credit lines.

    • I agree, if you have a positive opinion on Casino, Rally would be very attractive.

      I had a post about “leverage”. Rally is at the end of the day a leveraged bet on Casino with the advantage that for a potential investor, it is “safe” leverage.

      If you would by casino shares directly on margin, this would be much riskier.

      mmi

  • My alternate view is that Rallye’s leverage is actually both managable and fairly well structured. In the past, the leverage has been an issue for the wider group, but the increase of control of GPA in Brazil in 2013 will help to reduce Casino’s leverage and as a result potentially result in a re-rating of Casino, which in turn will reduce leverage levels at Rallye. Obviously you have to have a positive view on the underlying, Casino, in order to be comfortable with the leverage situation. Also some of the upcoming bond refi’s for Rallye will also be at a lower rate and while the debt is not even rated, it is not junk and also Casino/Rallye has ample cash in its subs as well as credit lines for the exercise of the rest of Monoprix in France as well as the Diniz put in Brazil when and if it comes. Additionally JC Nauori has plenty of levers to pull if he really needed or wanted to reduce both Casino/Rallye leverage including the sale of Viavarejo (Casas Bahia/Ponto Frio etc) in Brazil or even an IPO of C-Discount. While I think it is more likely the Brazilian electronics business will be sold than IPO of C-discount, my view is that this could further reduce risk for the Casino/Rallye structure.
    Time will tell,
    Jonathan

  • and it’s not over with holdings: Rallye is ca. 55% owned by Fonciere Euris, which is also ca. 80% owned y Finatis… both listed companies…
    if you want to have fun with their financial statements.
    By the way, Casino majority owner (I think?) and manager, JC Naouri, is a very shrewd business man.
    I do think there is a tad too much leverage in those balance sheets…

  • Oskar – would you not agree that rent is part of the normal retail operation, so you can adjust for such ‘leverage’ any way you like, i.e. by using Adj. EV / Ebitdar metrics etc, however, the real impact on the company’s FCF is similar to other opex that are difficult to reduce over the short/medium term. It will also depend on the terms of your lease contracts (length, CPI-linked, break clauses etc).

    Memyselfandi – why not go long Rallye and short Casion / Go in proportion to capture the dicount to FV?

    • #Scrooge,

      I have thought about that trade too. You even have ~2% positive carry before borrowing costs.

      The problem is that Rallye is ~ 3-4 times levered. So if casino drops by a third, Rallye’s equity is wiped out. I am not sure if they will then be able to roll their debt.

      mmi

  • To me retail-chains always have the problem of potential additional leverage through their rental obligations (future rental payments that do not always appear on the balance-sheet). These are some frustrating liabilites, becaus shrinking them almost always means shrinking revenues as well. If you think about the expected yield for a retail-property (cap rates around 7% – 8%) you realize, that these liabilities are actually quite costly, when compared to financial debt at other companies.

    • that’s absolutely correct. Shrinking retail chains should be avoided at any cost. Howver the rental model allows succesful chains to expand very quickly without finanical capital investment. This explains the good perfoamce of grwoing retail companies.

      As always, this “leverage” works both ways.

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