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8/4/2019 CA_FP - JPM062811
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Europe Equity Research29 June 2011
CarrefourOverweightCARR.PA, CA FP
Conclusions on Brazil: Positive for CarrefourPrice: 27.48
Price Target: 40.00
European Food Retail
Matthew TrumanAC
(44-20) 7325-0993
matthew.truman@jpmorgan.com
J.P. Morgan Securities Ltd.
Paul Diamond
(44-20) 7325-9972
paul.r.diamond@jpmorgan.com
J.P. Morgan Securities Ltd.
Chiara Battistini
(44-20) 7155-6158
chiara.x.battistini@jpmorgan.com
J.P. Morgan Securities Ltd.
Latam Retail & Healthcare
Andrea Teixeira, CFA
(1-212) 622-6735
andrea.f.teixeira@jpmorgan.com
J.P. Morgan Securities LLC
For Specialist Sales advice, pleacontact:
Sophie L Warrick
(44-20) 7779-3409
sophie.l.warrick@jpmorgan.com
YTD 1m 3m 12m
Abs -14.3% -12.8% -16.3% -30.2%Rel -9.1% -7.4% -11.8% -34.7%
Carrefour SA (CARR.PA;CA FP)
FYE Dec 2010A 2011E 2012E 2013EAdj. EPS FY () 1.18 1.75 2.19 2.54Revenue FY ( mn) 80,511 84,157 88,640 93,828EBITDA FY ( mn) 4,338 4,727 5,303 5,606
EBITA (Calc) FY ( mn) 2,687 2,644 3,128 3,543EV/Revenue FY 0.3 0.3 0.3 0.3EV/EBITDA FY 5.9 5.6 5.0 4.8
DPS (Net) FY () 1.08 1.60 2.00 2.32Adj P/E FY 23.2 15.7 12.6 10.8Source: Company data, Bloomberg, J.P. Morgan estimates.
Company DataPrice () 27.4Date Of Price 28 Jun 1Price Target () 40.0
Price Target End Date 31 Dec 152-week Range () 41.28 - 25.9Mkt Cap ( bn) 19.
Shares O/S (mn) 70
See page 15 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mahave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making the
investment decision.
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30
35
40
45
Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Price Performance
CARR.PA share price ()
MSCI-Eu (rebased)
Carrefour disclosed on Tuesday 28 June that it had received a proposal fromGama, a newly formed investor consortium, to merge the two largest Brazilianretail assets Cia. Brasileira de Distribuio (CBD) and Carrefour Brazil to
create a Brazilian market leader in the retail industry. At the same time, CBDhad received the same proposal. Our initial conclusions are as follows:
Assuming it is completed as planned this looks a strong deal forCarrefour. With a weaker business than CBD in both profit and marketshare terms Carrefour is effectively "selling" its Brazilian business into the"New Co" at 8.6x EV/EBITDA. By contrast, Carrefour is only physically
paying 5.4x pre synergies on the 17% incremental stake to be part of thegroup, offering strong value creation from the start we estimate 1.8bn or
2.67 per share on the whole deal. The implicit "New Co" multiple of 7.4x
is materially below established multiples for the market. Returning theimplied New Co to typical Brazilian food retail multiples of 9-11x wouldsee strong value creation over time.
The proposed deal creates a national champion with 33bn of sales, 2.1bnof EBITDA (6.4%) with a 28% market share in food. The asset will besupported both politically and financially by BTG Pactual and the Brazilian
National Development Bank, effectively the sovereign wealth fund ofBrazil. Potential political and anti-trust hurdles may be more easilynavigated on this basis.
For Carrefour, it presents an opportunity to materially shift the focus of thegroup towards emerging markets. Carrefour is buying joint control of amarket leader, placing it comfortably ahead of Wal-Mart (11%) and
Cencosud (3%). The deal may also alert Wal-Mart in Brazil, triggeringalternative offers. The deal should also remove concerns on managementslong term commitment to Brazil.
Casino has a choice. Agree to the deal and have its CBD stake diluted initially but be part of a growth story in a crucial market, participate in meaningfulsynergies whilst ensuring a political relationship remains. The medium termopportunity to own the group outright and the option to activate some of thematerial liquidity events in 2012 may be lost. Dont participate and sell theCBD stake would yield short term cash returns but meaningfully change theinvestment case for the business. Assuming Casino participates whilst near termvalue destruction occurs, a return to normalized LATAM multiples would alsosee value creation if synergies can be executed upon.
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Europe Equity Research29 June 2011
Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
Big Issues Our conclusionsCarrefour disclosed on Tuesday 28 June that it had received a proposal from Gama, a
newly formed investor consortium, to merge the two largest Brazilian retail assets
Cia. Brasileira de Distribuio (CBD, covered for J.P. Morgan by LatAm analyst
Andrea Teixeira, CFA) and Carrefour Brazil to create a Brazilian market leader in
the retail industry. At the same time, CBD had received the same proposal. Our
initial conclusions are as follows:
Assuming this deal is completed as planned this looks a strong deal for Carrefour.
With an undoubtedly weaker business than CBD in both profit and market share
terms Carrefour is effectively "selling" its Brazilian business into the "New Co"
at 8.6x EV/EBITDA pre synergies. By contrast, Carrefour is only physically
paying 5.4x pre synergies on the incremental 17% stake to be part of the NewCo, meaning value creation at least on this part from day 1. On a post synergy
basis at the EBITDA level, this equates to just 3.3x EV/EBITDA. The deal
multiples in totality are materially below established multiples for the Latin
American Food Retail stocks. As a combined entity the group will implicitly
trade at 7.4x EV/EBITDA. Returning to normalized EV/EBITDA multiples for
the region would yield multiples of 9-11x EV/EBITDA and strong value creation
for the new entity from the outset in arbitrage terms at least. CBD shareholders
appear to believe this is so, trading up 15% as we write this note.
The announced synergies available by virtue of the deal total 700m, of which
Carrefours 50% share equates to 350m. Discounting the full 2013 annualisation
at the WACC of 7% leads us to 296m post tax capitalised at 11x earnings this
would equate to value creation of 2.2bn for Carrefour. Ironically, this is
broadly equivalent to the dilution for the existing Carrefour shareholders by
virtue of the new issue of 11.7% of preferred ordinary stock.
The deal structure removes a number of the uncertainties weighing on Carrefours
share price in recent weeks. Whilst we have expected ongoing pressure due to the
selling of the ordinary share ahead of the DIA spinoff on July 5th, investors were
questioning the threat of margin calls on the largest shareholder, in turn creating an
overhang situation. If anything with Gama acting in concert with Blue Capital, it
appears Blue Capital have committed more strongly to the Carrefour share in the
near term to medium term. At these deflated share price levels it also raises the
possibility of further M&A for parts or all of Carrefours business.
The deal would create a national champion, supported politically and financially
by the largest independent investment bank in LATAM, BTG Pactual and theBrazilian Development Bank, effectively a sovereign wealth fund. Political
hurdles for any competition commission enquiry and any anti-trust CADE
decision could be jumped given the high profile Brazilian support for the deal.
We do however recognize that CADEs delay of its judgement on the food
company Brasil Foods for 2 years may offer an example of a barrier to a near
term anti-trust ruling.
For Casino, the company faces a stark choice. By not supporting the deal the
press release yesterday by Casino suggested it was unlikely Casino faces the
risk of not being part of the newly created national retail champion in Brazil. If
Casino loses the proposed legal case it also faces losing out on the proposed
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Europe Equity Research29 June 2011
Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
value creation made possible by the merger, being the 700m synergies
available to both companies as it may just choose to sell of course assuming
these are executed upon. If Casino agrees to the deal, it will face much higherdilution than is currently modeled in our sum of the parts. Currently we value
CBD at 7.8x EBITDA in our sum of the parts and post the implied dilution we
estimate a value destruction of 800m or 7.3 per share would occur. Most
important for Casino is that its opportunity to take control of the company
(exercising its call option and electing a chairman alone would be enough to give
Casino control in June 2012 for $1) would be lost and with it the long term reason
to buy the underlying Casino share. Although we would caution that Casino has
already agreed to nominate Mr Diniz for 2012 so it appears Mr Diniz would still
control the company under this arrangement anyway in the near term. One side
effect is Casino would effectively belongCarrefour if it stayed in the
agreement, which we would consider unlikely for any length of time.
Investors and analysts alike have been encouraged by the growth of CBD, the
synergies on offer following the merger of Ponto Frio and Casa Bahia. With the
loss of control, the upside for Casino and the ability to pitch Casino as a genuine
growth stock with sector leading emerging market exposure and control would be
diminished. Not only that but any sale would likely forego the "liquidity/capital
events" we expected in 2012. Both a partnership with a bank to capitalize the
credit division of Casa Bahia and the potential IPO of the electronics division
Globex and its ecommerce company Nova.com are under study at present,
according to Casino. As we discuss below, Casino is likely to come under some
pressure from Mr Diniz due to his private real estate ownership of CBD stores
and as a result Casino could be forced into a corner. Fighting the deal would incur
costs but would almost certainly provide an opportunity for other market players
(Wal-Mart is #3 in the market) to participate in any alternative, which could leave
Casino with a similar fate. In any event, Casino could sell its stake and this wouldyield 3.0bn on our latest numbers but again would materially damage the Casino
investment case. Doing nothing may leave Carrefour Brazil open to Wal-Mart
which may prove more expensive in the medium term for Casino.
For Casino, if as its press release states it believes the proposal to be a "long
standing illegal planned financial transaction", we wonder why Casino has not
taken this further soon. Whilst the International Court is now involved, long
standing to us suggests longer than a few weeks since the initial discussions
began. This could really mean Casino is jostling for position to secure a better
deal within this proposal. Alterations to the proposal cannot therefore be ruled out
and we find ourselves believing the deal is more likely than not.
Mr Diniz owns c2bn Reais in real estate (878m) which is leased to CBD,
assuming a high single digit yield would mean c.80m of real estate rents perannum. Our view is that if Mr Diniz wants to place pressure on Casino to support
the deal, then he could contemplate increasing these rentals, placing pressure on
CBD but maintaining his relative wealth by transferring the value to the prop co
instead at a 16x multiple. Perhaps a side-show but a point to be aware of.
The combined business would have 32bn of turnover, 2.1bn of EBITDA and at
the implicit price being paid by Carrefour for the 50% stake would be worth
7.1bn, according to the press release. Valuing it appropriately based on average
multiples for LATAM would imply the value is worth 12.0bn, an immediate
value opportunity of 4.9bn. The business will have an announced 1.5bn of net
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Europe Equity Research29 June 2011
Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
debt (0.75x net debt to EBITDA) and therefore should have significant strategic
flexibility for the future. Whilst execution risks abound, it is hard to ignore that
the combined New Co would have 28% market share in Food, 23% inHomewares and a market leading electronics business. This is well ahead of Wal-
Marts 11% and Cencosuds 3%. The retail industry in Brazil is growing at 5%
per annum and is expected to continue at this pace for the medium term. Being
the market leader in such a growing market across different industries is a
powerful proposition.
For Carrefour, if fully consolidated, we estimate Brazil would represent 37% of
the group's sales whilst emerging markets as a whole would represent 47bn of
sales compared to the new group's sales of 115bn. As a consequence combining
Asia and the other 3-4bn of LATAM sales would mean 41% (47bn) of sales
would come from emerging markets compared to just 27% now. The deal also
removes the longer term investors concern that the Brazilian business would be
sold for the sake of short term value gain.
The structure of the deal leaves Carrrefour with 50% of the combined entity with
a stake valued at 7.1bn at these deflated merger multiples. Returning to long
term multiples indicates a stake worth 12.0bn vs. our prior estimate of 4.9bn.
Post dilution from the new issue this would offer estimated value creation of
6.7bn or 9.86 per share for the Carrefour group.
For Casino, the final 15.2% stake could be worth 3.7bn when a "normalised"
multiple is applied. Versus our current estimates, this would mean value creation
of 684m or 6.2 per Casino share. The initial value destruction is equivalent to
7.29 per share.
It is of course unclear at what price this deal will close. For the purpose of our
analysis, we assume immediate closure so take yesterdays prices for our working
assumptions.
Worth noting that new shareholders will likely bring more governance and
visibility for minority shareholders given the old preference shareholders with no
voting rights are being converted to ordinary shareholders. This will also bring a
more balanced ownership structure.
We like most have plenty of other questions, the big 5 for us are:
Most importantly, given control of CBD is run through Wilkes, why inject 1.5bn
into CBD prior to the merger as it is unlikely to dilute Casino's voting rights?
Secondly, why did Carrefour buy the remaining 21.4% to bring the holding to
50% in the vehicle when it could have just given the shares (c.33%% of New
Co) like DIA to its shareholders? Is there a legal loophole allowing Mr Diniz to complete this deal without
Casinos say-so? (One suspects not judging by Casinos press release and news
reports yesterday.)
What is the level of adjustment required to keep voting rights under 30% and
how will this be structured moving forwards?
Finally, what is the purpose of the 6% notification presumably the world is free
to buy shares on the open market? Does this suggest a more sizeable block of
shares is available for purchase?
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Europe Equity Research29 June 2011
Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
The Deal Laid Bare
Table 1: The deal summary (m unless otherwise stated)
CBD Shareholder structure Ordinaryshares (m)
Preferred shares(m)
Totalshares (m)
Casino 82.0 16.198.1
Diniz family 17.7 35.2 52.9Other 0.0 108.1
108.1Total 99.7 159.4 259.1
Implied stake pre capital injectionCasino 82.2% 10.1% 37.9%Diniz family 17.8% 22.1% 20.4%Other 0.0% 67.8% 41.7%Voting rights dictated as 50:50 as per share agreement in Wilkes, which is a partnership 50:50 owned by Casino and the Diniz family. Wilkes owns 65.6% of the ordinary shares
Capital injection (EURm) from Gama 1,500New shares (Assumed Ordinary shares issued with vot ing r ights) 51.8New share count (m) 310.9Diniz ownership (total shares) 17.0%Other 34.8%BTG Pactual & BNDS 16.7%Casino ownership (total shares) 31.6%
Total 100.0%
Pre Capital Injection
Gama valuation of CBD (BRLm) 17,100Implied price per share (BRL) 66Gama valuation of CBD (EURm) 7,506Implied price per share (EUR) 29.0Implied valuation of CO stake (BRLm) 6,474Implied valuation of CO stake (EURm) 2,842
Post Capital injection
Capital injection (EURm) 1,500Share count post capital injection (m) 310.9New valuation (EURm) 9,006Implied price per share (EUR) 29.0Implied CO stake 31.6%Implied Diniz stake 17.0%Implicit Casino and Dinizd ilution post capital injection -16.7%
Stage 1: Gama merger with CBD post E1.5bn capital injection
Gama share countOrdinary shares ratio 1.00Preferred shares ratio 0.95Total shares (m) 302.9Implied Casino stake in Gama 32.1%Implied Diniz stake in Gama 16.9%Implied Others stake in Gama 33.9%Implied BTG Pactual & BNDS stake in Gama 17.1%Original CBD shareholders stake in Gama (Stage 1) 78.6%
N.b Original CBD shareholders stake in Gama (Stage 2) 39.3%
Gama valuationBTG Pactual + BNDESPAR stake 21.4%O/W BTG 3.2%O/W BNDESPAR 18.0%Casino 30.5%Diniz Family and Controlling Interests 16.0%Other 32.1%Investment from BTG 1,000Implied Gama valuation (EURm) 10,006
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Europe Equity Research29 June 2011
Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
Stage 2: Gama merger with Carrefour BrazilEURm CBD Carrefour Combined
Sales 20,200 12,500 32,700
% share of combined 61.8% 38.2%
EBITDA 1,500 600 2,100% margin 7.4% 4.8% 6.4%% share of combined 71.4% 28.6%
Current Carrefour share price 27.0Shares issued (m) 90.0Implied value 2,430
Carrefour EBITDA at 50% 1,050Carrefour current EBITDA 600
New "Profit" created by Carrefour 450
Implied EV/EBITDA pre-synergies for CA's "buy in" 5.4x
Synergies 700Carrefour's stake of synergies 350
Discounted Carrefour's stake of synergies 296Theoretical EBITDA 746
Implied EV/EBITDA post-synergies 3.3x
Implicit valuation of the entire combined group based on BTG's in price not CA's share price
Em ShareGama 10,006 71.4%Carrefour Brazil 4,002 28.6%Total 14,009 100.0%Debt 1,500Total EV 15,509
Implied EV/EBITDA as a Group 7.39x
Carrefour's effective price realisation for its Brazilian business based on yesterday's CA closing price
Carrefour additional stake to get to 50-50% 17.04%Consideration paid 2,430Implied market cap. 14,29450% implied market cap. 7,147Less cash paid to obtain incremental stake (2,430)Carrefour Brazil Net debt (proportionally consolidated) 429Implied EV 5,146Carrefour exiting Brazilian EBITDA 600
EV/EBITDA achieved for CA's Brazilian business 8.6x
Post Merger Share Capital Stake Currentvaluation
Value atnorm.
multiples
Currentvalue in
our SOP
Initial valuecreation
(destruction)
Initial value creation(destruction) /share
Valuecreation
based onnorm
multiples
Per sharebased on norm
LATAMmultiples
BTG Pactual + BNDESPAR stake 10.7% 1,529 2,575
Casino 15.2%2,176
3,664 2,980 (804) (7.29)684
6.20
Diniz Family and Controlling Interests 8.0% 1,144 1,926Other 16.1% 2,297 3,867Carrefour 50.0% 7,147 12,033 5,331 1,816 2.67 6,701 9.86
Total 100.0% 14,294 24,065
Source: J.P. Morgan estimates, Company data.
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Europe Equity Research29 June 2011
Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
The Structure and mechanics of the
Proposed DealWe break the structure down into essentially two stages. Stage 1 is the Gama merger
with CBD and stage 2 is the merger of CBD with Carrefour's Brazilian business.
Below we lay out the shareholder structure, it is important to note that through the
Wilkes shareholding Casino and Diniz has joint control of the company.
Table 2: CBD's current shareholder structure
Ordinary shares Stake Preferred shares Stake otal shares Stake
Casino 82.0 82.2% 16.1 10.1% 98.1 37.9%
Diniz family 17.7 17.8% 35.2 22.1% 52.9 20.4%
Other 0.0 0.0% 108.1 67.8% 108.1 41.7%
Total 99.7 100.0% 159.4 100.0% 259.1 100.0%
Source: J.P. Morgan estimates, Company data.
Stage 1- Gama merger with CBD
Before the official merger can be completed, it is the stated intention of the existing
Gama shareholders, BTG Pactual and the Brazilian National Development Bank
(BNDS) to inject 1.5bn (pro rata) into the existing CBD business. As a result of this
capital injection the following shareholdings are created in CBD.
Figure 1: CBD's shareholder structure post 1.5bn capital injection
Our view is that this capital injection which we assume to be in ordinary shares
would effectively dilute all shareholdings thereby theoretically allowing acombination of the Diniz family and the new Gama vehicle to vote through the
proposed merger strategy. What is immediately problematic for Diniz is that the
voting rights are solely attributed to the Wilkes vehicle where Casino and Diniz
have a 50% share. Therefore issuing ordinary non Wilkes shares will be unlikely to
change this arrangement unless there is a loophole for new capital. The biggest
stumbling point of this deal in our view remains Casino and its legal position given
its current joint voting rights. Casino sits in a difficult position regarding this
proposal. On one hand, it appears from Casino's press release yesterday that it
believes the approach is illegal...
31.6%
17.0%16.7%
34.8%
Casino ownership (total shares) Diniz onnership (total shares) BTG Pactual & BNDS Other
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Europe Equity Research29 June 2011
Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
"contrary to the terms of the press release, it (the approach) is not a spontaneous
proposal from Gama, a financial investment vehicle but a long standing illegal
planned financial transaction between Carrefour and Abilio Diniz. Casino pressrelease June 28, 2011
If Casino believes its legal position is strong, winning would safeguard its upcoming
call options and its planned strategy liquidity events in 2012 such as Novo.com. It
would also safeguard Casinos future ability to control and fully consolidate a key
growth asset which has become the key to many peoples appreciation of the stock.
On the flipside it would ignore the synergies of 700m, which capitalized could be
worth an estimated 646m to Casino in value creation" terms, and the chance to be
part of the undisputed market leader in a structurally growing market such as Brazil.
It would of course potentially forsake political support from the Government and
leading banks over time. If Casino agreed to the deal, it would face dilution at a
much higher level than is currently modeled in our sum of the parts. Currently we
value CBD at 7.8x EBITDA in our sum of the parts which equates to near termvalue destruction of 7.3 per share with the potential for creation once normalized
LATAM multiples are applied to the tune of 6.2 per share.
Investors and analysts alike have been encouraged by the growth of CBD, the
synergies on offer following the merger of Ponto Frio and Casa Bahia and with the
ability to pitch Casino as a genuine growth stock with sector leading emerging
market exposure. Clearly a loss of control would see this investment case diminish.
Any sale would likely forego the "liquidity/capital events" we expected in 2012.
Both a partnership with a bank to capitalize the credit division of Casa Bahia and the
potential IPO of the electronics division Globex and its ecommerce company
Nova.com are under study at present, according to Casino. As we discuss below,
Casino is likely to come under some pressure from Diniz due to Diniz's real estate
ownership and as a result Casino could be forced into a corner. Fighting the dealwould incur costs but would almost certainly provide an opportunity for other market
players (Wal-Mart is #3 in the market) to participate in any alternative which could
leave Casino with a similar fate. In any event, Casino could sell its stake and this
would yield 3.0bn on our latest numbers but again would materially change the
Casino investment case and achieve little but short term cash in hand. Doing nothing
may leave Carrefour Brazil open to Wal-Mart which may prove more expensive in
the medium term for Casino.
It is worth noting that Diniz owns c2bn Reais in real estate (878m) which is leased
to CBD, assuming a high single digit yield would mean c.80m of real estate rents
per annum. Our view is that if Diniz wants to place pressure on Casino to support the
deal, then he could contemplate increasing these rentals placing pressure on CBD butmaintaining his relative wealth by transferring the value to the prop co instead.
Perhaps a side-show but a point to be aware of nevertheless.
For Casino, if as its press release states it believes the proposal to be a "long standing
illegal planned financial transaction", we wonder why Casino has not taken this
further sooner. Whilst the International Court is now involved, long standing to us
suggests longer than a few weeks. This could really mean Casino is jostling for
position to secure a better deal within this proposal. Alterations to the proposal
cannot therefore be ruled out. Finding a better tool with which to enhance
perceived value over the longer term is difficult to see also. We find ourselves
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Europe Equity Research29 June 2011
Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
believing that Casino will agree to this proposal for the sake of long term value
creation and the ability to remain in play in a key growth market.
A summary of the future call options is included below:
Casino today has over 37% interest in GPA through a combination of a directholding and an indirect holding through a holding company above GPA (Wilkes),where ownership is split equally between Casino and the Diniz family. Casino hasthe option to elect the chairman of GPA and effectively take control of this holdingcompany for a symbolic $1 in 2012. This holding company controls GPA, thereforetaking control of the holding gives control of GPA. However, this action wouldtrigger a put option which the Diniz family could exercise on part of their stake. Thefirst put option would be in 2012 on 0.4% of GPA and the second option would lastfor eight years starting June 2014 for 7.6% stake of GPA. With 42% stake in GPA in2012 Casino would consolidate GPA globally compared to the current method of
proportional consolidation. Exercising their call option and electing a chairman alonewould be enough to give Casino control and therefore under IFRS full consolidationwould be required. What has become apparent is that Casino had consented to votingDiniz in as Chairman during 2012 meaning very little change in control. Whetherthat has been ratified is another question we have.
Table 3: Stage 1 summary (m unless otherwise stated)
Stage 1: Gama merger with CBD post 1.5bn capital injection
Gama share countOrdinary shares ratio 1.00Preferred shares ratio 0.95
Total shares (m) 302.9Implied Casino stake in Gama 32.1%Implied Diniz Family and Controlling Interests stake in Gama 16.9%Implied Others stake in Gama 33.9%
Implied BTG Pactual & BNDS stake in Gama 17.1%Original CBD shareholders stake in Gama (Stage 1) 78.6%N.b Original CBD shareholders stake in Gama (stage 2) 39.3%
Gama valuationBTG Pactual + BNDESPAR stake 21.4%
O/W BTG 3.2%O/W BNDESPAR 18.2%Casino 30.5%Diniz Family and Controlling Interests 16.0%
Other 32.1%Investment from BTG 1,000Implied Gama valuation (EURm) 10,006Containing CBD (EURm) 7,506
Cash in the Vehicle (EURm) 1,000 Capital Injection (EURm) 1,500
Source: J.P. Morgan estimates, Company data.
Stage 2: Merging Carrefour Brazil with CBD
Assuming Casino agrees to the deal, stage 2 is to integrate Carrefour Brazil and CBD
and below we lay out our analysis to achieve that. We conclude that the multiples
look attractive for Carrefour on both a pre and post synergy basis given Carrefour
effectively sells its business to "New Co" for 8.6x EBITDA but then buys into the
business at implicitly 5.4x EBITDA pre synergies and 3.3x post synergies. For
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Europe Equity Research29 June 2011
Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
Carrefour it leaves it with a 50% stake worth 7.1bn which has cost it 2.4bn to
facilitate alongside the merger. Comparing this to our prior Brazilian valuation in our
sum of the parts suggests initial value creation of 1.8bn, normalising multiples tolong term averages suggests value creation of 6.7bn or 9.86 per share. Bottom line,
Carrefour is merging a weak asset with low profitability at present with the market
leader that is growing much faster. It is doing so at a lower than expected multiple,
the synergies are offsetting the dilution and so longer term this should create value.
As a side effect, such a proposed transaction may "prick the ears of Wal-Mart and
further bids could be expected driving the price up further. For Carrefour we believe
it offers long term opportunity cost, an attractive in price and operational synergies
unavailable elsewhere and an almost unassailable market leading position in an
attractive growth market.
For Diniz, BTG Pactual and the Brazilian National Bank, it provides a significant
holding (11.7%) in a lowly valued but Global asset and an experienced strategic
shareholder as a Partner in Blue Capital whilst also diversifying their collectivewealth away from purely Brazil at the same time. It creates a National Champion
which the Brazilian Government can protect and protects Diniz from ultimately
ceding control to Casino, a company that is much smaller with much less financial
clout.
For Casino, it provides further dilution on entry price, the somewhat awkward effect
that it will be long Carrefour as a consequence, the loss of call options to buy the
whole company alongside the cancellation of likely liquidity events. It does
ultimately enable it to stay at the table as regards long term value creation, and it
does enable it to create 0.6bn of synergies, we estimate. It also protects its
immediate interest in CBD.
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Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
Table 4: Stage 2 summary (m unless otherwise stated)
Stage 2: Gama merger with Carrefour BrazilEURm CBD Carrefour Combined
Sales 20,200 12,500 32,700% share of combined 61.8% 38.2%
EBITDA 1,500 600 2,100% margin 7.4% 4.8% 6.4%% share of combined 71.4% 28.6%
Current Carrefour share price 27.0Shares issued (m) 90.0Implied value 2,430
Carrefour EBITDA at 50% 1,050Carrefour current EBITDA 600
New "Profit" created by Carrefour 450
Implied EV/EBITDA pre-synergies for CA's "buy in" 5.4x
Synergies 700Carrefour's stake of synergies 350Discounted Carrefour's stake of synergies 296Theoretical EBITDA 746
Implied EV/EBITDA post-synergies 3.3x
Implicit valuation of the entire combined group based on BTG's in price not CA's share price
Em ShareGama 10,006 71.4%Carrefour Brazil 4,002 28.6%Total 14,009 100.0%Debt 1,500Total EV 15,509
Implied EV/EBITDA as a Group 7.39x
Carrefour's effective price realisation for its Brazilian business based on yesterday's CA closingprice
Carrefour additional stake to get to 50-50% 17.04%Consideration paid 2,430Implied market cap. 14,29450% implied market cap. 7,147Less cash paid to obtain incremental stake (2,430)Carrefour Brazil Net debt (proportionally consolidated) 429Implied EV 5,146Carrefour exiting Brazilian EBITDA 600
EV/EBITDA achieved for CA's Brazilian business 8.6x
Post Merger Share Capital Stake Currentvaluation
Value atnorm.
multiple
s
Currentvalue in
our
SOP
Initial valuecreation
(destruction)
Initial valuecreation
(destruction)
/share
Valuecreation
based on
normLATAM
multiples
Per sharebased on
norm LATAM
multiples
BTG Pactual + BNDESPAR stake 10.7% 1,529 2,575Casino 15.2% 2,176 3,664 2,980 (804) (7.29) 684 6.20Diniz Family and Controlling Interests 8.0% 1,144 1,926Other 16.1% 2,297 3,867Carrefour 50.0% 7,147 12,033 5,331 1,816 2.67 6,701 9.86
Total 100.0% 14,29424,065
Source: J.P. Morgan estimates, Company data.
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Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
Valuation Methodology and Risks
Carrefour(Overweight Price Target: 40.00)
Valuation Methodology :
We value Carrefour on a sum of the parts basis indicating a value to 40 per share,which excludes DIA and Thailand, (despite our multiples in emerging marketsmaterially lagging current valuations and recent transactions).
Risks to Our View :
We believe the key risk to our target price being achieved is that management fails toexecute the Transformation Plan and the new 'Planet' hypers are not well received by
customers. We could see more margin pressure than expected as the company isforced to reduce prices further as the competitive environment sharpens in its keymarkets and cost savings do not come through as expected.
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Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
JPM Q-ProfileCarrefour S.A. (FRANCE / Consumer Staples)As Of: 23-Jun-2011 Quant_Strategy@jpmorgan.com
Local Share Price Current: 27.16 12 Mth Forward EPS Current: 2.39
Earnings Yield (& local bond Yield) Current: 9% Implied Value Of Growth* Current: -5.35%
PE (1Yr Forward) Current: 11.4x Price/Book Value Current: 1.9x
ROE (Trailing) Current: 3.89 Dividend Yield (Trailing) Current: 3.51
Summary
Carrefour S.A. 26517.32 As Of:
FRANCE 145.54 SEDOL 5641567 Local Price: 27.16
Consumer Staples Food & Staples Retailing EPS: 2.39
Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg
12mth Forward PE 11.36x 9.79 52.33 17.77 22.56 42.99 2.12 -14% 361% 56% 99%
P/BV (Trailing) 1.91x 1.83 9.92 4.38 4.66 8.26 1.07 -4% 418% 129% 144%
Dividend Yield (Trailing) 3.51 0.47 4.03 1.77 1.76 3.77 -0.25 -87% 15% -49% -50%
ROE (Trailing) 3.89 3.41 27.40 17.84 17.37 30.38 4.35 -12% 605% 359% 347%
Implied Value of Growth -5.3% -0.21 0.81 0.38 0.41 0.95 -0.12 -299% 1622% 813% 873%
Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP)
23-Jun-11
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Carrefour: Summary of FinancialsProfit and Loss Statement Cash flow statement
in millions, year end Dec FY09 FY10 FY11E FY12E FY13E in millions, year end Dec FY09 FY10 FY11E FY12E FY13E
Sales 85,365 80,511 84,157 88,640 93,828 Net cashflow 3,420 2,209 2,879 3,516 3,989
Growth -1.8% -5.7% 4.5% 5.3% 5.9% Capex (2,137) (1,825) (2,465) (3,075) (3,300)
EBITDAR 5,236 5,277 5,708 6,336 6,700 Acquisitions 0 21 0 0 0
% of sales 6.1% 6.6% 6.8% 7.1% 7.1% Working capital change 320 (664) 722 637 834
EBITDA 4,079 4,338 4,727 5,303 5,606 Capital increase/ treasury - - - - -
% of sales 4.8% 5.4% 5.6% 6.0% 6.0% Dividends (894) (315) (734) (1,086) (1,356)
Depreciation (1,848) (1,651) (2,082) (2,175) (2,063) Other (394) (346) 369 (0) (0)
EBITA 2,231 2,687 2,644 3,128 3,543
% of sales 2.6% 3.3% 3.1% 3.5% 3.8% Net debt (increase)/ decrease - - - - -
Net Interest (610) (606) (590) (580) (580)
Pre- ax profit 549 1,082 1,554 2,398 2,963 Net (debt)/ cash (6,461) (7,854) (7,662) (8,343) (8,249)
Tax (638) (610) (575) (887) (1,096)
Associates - - - - -
Minority interests (110) (139) (153) (175) (196)
Reported Net Att. Profit (161) 368 874 1,391 1,729Adjusted Net Att. Profit 911 804 1,189 1,485 1,729
No of shares (diluted) - - - - -
EPS (diluted) - - - - -
Balance sheet
in millions, year end Dec FY FY FYE FYE FYE
Total fixed assets - - - - -
Inventories 6,670 6,455 6,347 6,568 6,834
Debtors 2,238 2,376 2,398 2,428 2,571
Short term investments - - - - -
Cash and banks 3,301 2,954 2,954 2,954 2,954
Current assets 21,274 21,211 20,653 20,906 21,315
OTAL ASSETS 51,556 50,397 50,452 51,830 53,475
Total Shareholders' funds - - - - -
Minority interests - - - - -
Provisions (3,016) (3,564) (3,564) (3,564) (3,564)Debt - - - - -
Trade creditors (16,436) (14,562) (15,154) (15,982) (16,939)
Other short term creditors - - - - -
OTAL LIABILITIES - - - - -
Source: Company reports and J.P. Morgan estimates.
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Matthew Truman(44-20) 7325-0993matthew.truman@jpmorgan.com
Other Companies Recommended in This Report (all prices in this report as of market close on 28 June 2011)Casino (CASP.PA/62.29/Overweight), Companhia Brasileira de Distribuicao (CBD) (PCAR4.SA/R$74.62/Underweight)
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple researchanalysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the documentindividually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the viewsexpressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part ofany of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or viewsexpressed by the research analyst(s) in this report.
Important Disclosures
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Carrefour,Casino within the past 12 months.
Client:J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Carrefour, Casino,Companhia Brasileira de Distribuicao (CBD).
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investmentbanking clients: Carrefour, Casino.
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the followingcompany(ies) as clients, and the services provided were non-investment-banking, securities-related: Carrefour, Casino.
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,and the services provided were non-securities-related: Carrefour, Casino.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Carrefour,Casino.
Investment Banking (next 3 months): J.P. Morgan expect to receive, or intend to seek, compensation for investment bankingservices in the next three months from Carrefour, Casino.
Non-Investment Banking Compensation:J.P. Morgan has received compensation in the past 12 months for products or servicesother than investment banking from Carrefour, Casino.
Date Rating Share Price()
Price Target()
02-Jan-07 N 45.94 46.00
12-Jan-07 UW 44.20 43.00
04-Feb-07 UW 46.31 48.00
05-Feb-07 N 46.31 48.00
28-Mar-07 N 54.18 50.00
11-Apr-07 N 56.12 55.00
03-Aug-07 N 52.14 60.00
05-Aug-07 OW 51.03 60.00
13-May-08 OW 46.25 54.00
26-Jun-08 N 37.88 42.00
09-Jul-08 N 34.45 39.00
01-Sep-08 UW 36.13 37.00
16-Oct-08 UW 24.68 28.00
26-Feb-09 N 26.32 28.00
22-May-09 N 30.52 33.00
24-Nov-09 OW 31.55 40.00
12-Oct-10 OW 38.94 56.40
17-Jun-11 OW 27.74 45.00
20-Jun-11 OW 26.86 40.00
0
16
32
48
64
80
96
Price()
Sep
06
Jun
07
Mar
08
Dec
08
Sep
09
Jun
10
Mar
11
Carrefour (CARR.PA) Price Chart
UW 48N 55 N 39
UW 43N 50 OW 60 N 42UW 28 N 33 OW 4
N 46N 48 N 60 OW 54UW 37 N 28 OW 40 OW 56.4 OW 4
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Jan 02, 2007.
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Date Rating Share Price()
Price Target()
13-Dec-06 N 62.89 71.00
25-Jan-07 N 60.23 66.00
15-Mar-07 N 59.41 72.00
04-Jun-07 N 71.42 80.00
07-Jul-08 UW 63.21 76.00
29-Aug-08 N 58.50 68.00
17-Oct-08 N 42.62 50.00
12-Dec-08 OW 43.84 55.00
22-Apr-09 OW 41.14 52.00
14-May-09 N 44.06 50.00
28-Aug-09 N 52.15 52.00
20-Nov-09 N 57.23 62.00
12-Oct-10 OW 66.75 82.00
Date Rating Share Price(R$)
Price Target(R$)
04-Apr-07 OW 30.97 75.00
05-Oct-07 N 26.79 32.00
10-Jun-08 N 37.46 44.00
13-Nov-08 N 34.81 39.00
24-Sep-09 OW 49.24 63.00
19-Jan-10 OW 67.99 81.00
21-Jan-10 OW 64.60 83.00
07-Jul-10 OW 64.18 81.00
30-Jul-10 N 58.45 64.00
10-Sep-10 N 59.38 72.00
21-Jun-11 UW 66.00 75.00
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entireperiod.J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform theaverage total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months,we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverageuniverse.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocksin the analyst's (or the analyst's team's) coverage universe.] The analyst or analyst's team's coverage universe is the sector and/or countryshown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: Truman, Matthew: Ahold (AHLN.AS), Carrefour (CARR.PA), Metro (MEOG.DE), Migros Ticaret (MGROS.IS),Morrison (MRW.L), Sainsbury (SBRY.L), Tesco (TSCO.L)
0
18
36
54
72
90
108
126
Price()
Sep
06
Jun
07
Mar
08
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09
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11
Casino (CASP.PA) Price Chart
N 72 N 50
N 66 N 68 N 50 N 62
N 71 N 80 UW 76 OW 55OW 52 N 52 OW 82
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Dec 13, 2006.
0
21
42
63
84
105
126
Price(R$)
Oct
06
Jul
07
Apr
08
Jan
09
Oct
09
Jul
10
Apr
11
Companhia Brasileira de Distribuicao (CBD) (PCAR4.SA) Price Chart
N R$72
OW R$83 N R$64
OW R$75 N R$32 N R$44 N R$39 OW R$63OW R$81 OW R$81 UW R$7
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Apr 04, 2007.
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J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2011
Overweight(buy)
Neutral(hold)
Underweight(sell)
J.P. Morgan Global Equity Research Coverage 47% 42% 11%IB clients* 50% 45% 33%
JPMS Equity Research Coverage 43% 49% 8%
IB clients* 70% 62% 56%
*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.
Equity Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology andrisks on any securities recommended herein. Research is available athttp://www.morganmarkets.com , or you can contact the analystnamed on the front of this note or your J.P. Morgan representative.
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which include revenues from, among other business units, Institutional Equities and Investment Banking.Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-USaffiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS,and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, publicappearances, and trading securities held by a research analyst account.
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