By Camilla Palladino
Rumours about a possible offer for Carrefour are stepping up a notch. And it is not hard to see why possible predators such as Wal-Mart might be tempted to circle the troubled French retailer.
Carrefour shows little sign of being able to improve its dismal performance. Its share price languishes at less than half of its late 1999 peak. The management has failed to stop a slide in like-for-like sales. The company recently cut its revenue forecasts for this year. And while Carrefour denies that Daniel Bernard, its chief executive, has been set a year-end deadline to show some improvement, his credibility is clearly at a low ebb.
The retailer is also more vulnerable to a bid following the recent renewal of its shareholders’ agreement. Some of the founding families, accounting for 5% of voting rights, have withdrawn.
Meanwhile Wal-Mart seems to be stepping up its interest in expanding in Europe. Its chief executive, Scott Lee, recently talked to the anti-trust authorities in Brussels, triggering speculation that the company is eyeing deals in continental Europe.
Carrefour could be the US retailer’s ideal prize. In terms of planting flags around the globe, buying the second-largest operator after itself would provide an unrivalled opportunity for the US group. There is hardly any geographical overlap. And if Wal-Mart bought Carrefour, it would become the largest food retailer in Europe and Latin America, and the biggest foreign group in Asia. What’s more, Wal-Mart would get access to France, Italy and Spain, which are almost impossible to enter without buying an existing retailer.
The majority of Carrefour’s sales come from hypermarkets, which are similar to Wal-Mart’s supercentres in the US. These big stores have enough room to sell non-food lines as well as food, which is where Wal-Mart’s core strength lies.
That said, any deal between the two could raise political and financial challenges. French politicians are wary of foreign predators. And although food retailing is hardly a strategic industry, they might still resist ceding their national prize to Wal-Mart.
Financially, too, Wal-Mart would have to work hard to make a deal stack up. If the US company wanted to offer Carrefour’s investors a 30% premium on the current price of e39 a share, the total cost would be about e44 billion, including assumed debt. Carrefour is expected to make e3.4 billion of operating profits this year, according to CSFB. Taxed at a notional 30% rate, these would amount to a measly return of 5.4% on Wal-Mart’s investment. To get that return up to a more respectable 8%, Wal-Mart would need to add e1.6 billion to Carrefour’s operating profits.
There wouldn’t be huge room for cost cuts. Carrefour already operates on high margins, compared with the rest of the sector. And food retailing doesn’t offer much scope for synergies since it is largely sourced on a national basis. Assume that on Carrefour’s non-food offering, which amounts to about 20% of its sales, Wal-Mart might be able cut about e1 billion out of costs. That would still leave it counting on less reliable revenue synergies to make a decent return.
These might be hard to find. Wal-Mart would have trouble opening many new stores in France and elsewhere in western Europe, where planning restrictions apply. What’s more, Wal-Mart’s strategy might be constrained by French regulations that prevent retailers from selling below cost.
A final hurdle for Wal-Mart would be convincing the Carrefour shareholding families to sell out at a 30% premium to the current, depressed share price. Although the shareholder pact has shrunk, that’s still some task. The Halley and March families, with 25%, have bound themselves into a new agreement. They might not want to sell out at a low point in the company’s fortunes – especially if they believe its problems could be fixed. And while Wal-Mart could always make a hostile bid, that would be fraught with risk. Getting support would be hard, especially given that Wal-Mart – and Americans in general – aren’t flavour of the month in France.
The challenge for Wal-Mart might well be to concoct a deal that’s acceptable to Carrefour’s shareholders and doesn’t destroy value for its own. This doesn’t preclude a swoop, of course. But it does mean that, to make a tie-up worth its while, Wal-Mart needs to come up with some clever political and financial ideas.
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