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January 7, 2022

Breakingviews: Reheated French grocer deal is still unappetising

by Breakingviews.

France’s latest attempt at a grocer merger may work on paper, but is still unlikely to make it to the till. Auchan is eyeing another swoop on its $16 billion rival Carrefour, using support from private equity groups to overcome the funding issues that scuppered last year’s offer. But a deal could still struggle to win the approval of the French government.

Carrefour Chief Executive Alexandre Bompard may soon face his third takeover approach in just 12 months. Canada’s Alimentation Couche-Tard was forced to drop its 20 euro a share offer in January 2021 after the French government opposed the deal. Last October, domestic rival Auchan attempted a swoop, but its 17 billion euro offer was nearly 30% in shares, a tough ask given its lack of a public listing.

A plan to involve buyout groups, with CVC Capital Partners, KKR and Clayton Dubilier & Rice interested according to Les Echos, may help. The newspaper reckons Auchan may pay 23.50 euros a share, which would value Carrefour at 24 billion euros including debt. If the deal were structured like a traditional buyout, then the bidders could probably fund it using debt equivalent to at least 4 times 2021 EBITDA, or 18 billion euros. That would leave just 6 billion euros of equity to rustle up.

And there are plenty of reasons why private equity groups might go along for the ride. Carrefour’s equity is valued at just 10 times forward earnings, according to Refinitiv, a discount to rivals on 14 times. It has a 72% stake in a fast-growing Brazilian business, which could probably be sold at a premium. And it owns most of its property, leaving scope to raise cash by selling and leasing back stores. Combining the first and fourth largest French grocers would create cost savings: one banker estimates those at 1 billion euros per annum.

These benefits, however, are the very reasons French President Emmanuel Macron may object to a deal. Macron scuppered Couche-Tard’s offer for Carrefour even though the Canadian firm promised to protect French workers and suppliers. They would probably fare worse in a merger with Auchan. And both groups are struggling in the core market, with a stagnant market share and competition from nimble discounters and online retailers. Allowing them to merge could create an even bigger headache for Macron.

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