Casino’s International Ambitions Left in Tatters by CBD-Carrefour Merger Proposal

Having been within a year of gaining full control of CBD, Brazil’s largest grocery retailer, Casino Guichard-Perrachon, has been left reeling after the shock news of a proposed merger between its supposed partner and its great rival, Carrefour.

Casino’s long-standing involvement with CBD seemed a firm rock upon which to build

Casino has been investing in the Brazilian market, and Cia Brasileira de Distribuição SA (known as CBD), since 1999, but in 2005 its involvement in CBD was formalised as a 50% share of a holding company called Wilkes, which controls around two-thirds of CBD. The other 50% share in Wilkes is held by the Diniz family, CBD’s founders, under the leadership of Abilio Diniz. The 2005 deal specified that in 2012 Casino would have the option to buy up the Diniz family’s share of Wilkes, thereby giving it control of CBD. A shareholders agreement was also signed to confirm that no talks would be held about the future of CBD without the involvement of Casino.

News of secret talks with Carrefour damaged trust between Casino and Diniz family

When news first emerged in May that Carrefour had been in talks with the Diniz family, which currently holds control of CBD, Casino was quick to warn Carrefour away, but appeared initially reassured that the Diniz family did not intend to join in with any intrigue. According to French newspaper Le Figaro, Casino Chief Executive Jean-Charles Naouri wrote to Carrefour CEO Lars Olofsson to argue that Casino should be involved in any talks about the future of CBD, but, it is claimed, also said that the Diniz family had assured Casino that it intended to respect their deal, despite the approach by Carrefour.

However, this trust was short-lived, and by the end of the month Casino had requested arbitration from the International Chamber of Commerce in an effort to stop Abilio Diniz and his family from continuing talks with Carrefour. The move was seen as a sign that relations between Casino and Diniz were becoming strained, and once the merger proposal had become official there was no disguising Casino’s bitterness, with Casino Group’s press release on the affair stating: “Contrary to the terms of the press release, it is not a spontaneous proposal from Gama, a financial investment vehicle, but a long-standing illegal planned financial transaction between Carrefour and Abilio Diniz”.

Merger proposal is far from straightforward

While the run-up to the merger proposal has been somewhat irregular, the proposed new structure for the company is equally convoluted.

The foreign investment arm of Brazil’s state-owned National Development Bank, known as BNDESPar, and investment fund BTG Pactual are funding the US$2 billion bid through a jointly owned company, Gama. The proposal is for Carrefour and CBD to merge into an entity owned on a 50:50 basis by Gama and Carrefour, with current CBD shares exchanged for Gama shares. Obviously, as things stand, Carrefour’s current Brazilian operations are not on an equal footing with CBD, so in order for Carrefour to hold a 50% share of the new entity, Gama would have to contribute to Carrefour’s stake; in exchange for this, Carrefour would issue Gama with an 11.7% stake in the Carrefour Group and two seats on the executive board, including that of the vice chairman. Gama would then form a voting bloc with two of Carrefour’s most powerful, and most troublesome, shareholders, Colony and Bernard Arnault, with their combined share capped at a still powerful 30%.

Together, CBD and Carrefour would account for an 18% share of Brazilian grocery retail.

The New CBD Structure According to GAMA’s Proposal: Less Than Simple

Complex proposal knits together a web of different interests

The reasons behind the complexity of this merger proposal are centred on the wide variety of different interests that it is designed to serve:

• The Diniz family: 74-year-old Abilio Diniz has remained as Chairman since stepping down as CBD Chief Executive in 2002, and still goes to the office daily. If Casino were to gain full control in 2012, as is possible under the current arrangements, he might have been ousted from the company. Faced with this once-distant prospect becoming a more imminent possibility, it seems that Diniz – still healthy and active despite his age, and the victorious veteran of several long-running boardroom battles – has decided not to go gently.
• BNDESPar: The lion’s share of the additional funding for this bid is being provided by Brazil’s National Development Bank (BNDES), which sees the plan as offering CBD, as a major shareholder of one of the world’s biggest grocery retailers, a more prominent place on the global stage and as a way to extend the global reach of Brazilian exports. In a market where US retail giant Wal-Mart is also already extremely powerful, it has the additional benefit of preventing one of the country’s major retailers falling under the sole control of a foreign company.
• Carrefour: Carrefour’s reliance on the mature markets of Western Europe looks increasingly out-of-step with the strategies of its two biggest global rivals, Wal-Mart and Tesco. The Latin American market is one of the few sources of strong sales growth for the company, but has not been without its problems: in its most recent financial year, operational problems at the Brazilian unit resulted in a €550 million write-off, hitting group profit levels. The Gama deal represents a rise in market share for Carrefour, with the added benefit of CBD’s management expertise. This would in any case be an attraction, given the company’s recent difficulties in Brazil and its need to focus on strengthening its hold in core West European markets, but it also chimes well with the success that Carrefour has found in other emerging markets, particularly the Middle East, through close collaborations with local partners.
• Blue Capital: The alliance between US investment group Colony Capital and Bernard Arnault, head of LVMH, has made no secret of the fact that it wants the share price to rise in order for these two powerful players to be able to recoup their investment in the company. Their proposal for a quick fix by way of a property spin-off had to be abandoned after running into stiff opposition from other investors, but the addition of Gama to its voting shares would give the bloc a 30% say in running the company. In addition, stronger prospects in Brazil may also serve to raise Carrefour’s share price to more acceptable levels.

Merger news is an enormous blow to Casino

The impact on Casino of this merger proposal is massive. Brazil has become a key market for the company and is by far its largest market outside France. Between 2005-10, the company exited a number of other markets, including Lithuania, the Netherlands, Saudi Arabia, Poland, Taiwan and Venezuela, leaving Brazil as the cornerstone of future international growth. Building on this, in May 2010, Casino announced a plan to invest over €2 billion in Brazil over 2010-2012 and open around 100 new outlets annually.

In early June, Casino raised its stake in CBD from 34% to 37%, but this defensive manoeuvre still has not given the company sufficient power to stop the deal in its tracks.. In reality, Casino is now left with little to fall back on except its claims of ‘ungentlemanly conduct’; even the hope that the deal will fall foul of Brazilian anti-competition rules seems far-fetched in light of BNDESPar’s involvement. A fierce legal battle seems inevitable, but is unlikely to be short, and, with the main shareholders at loggerheads, CBD’s market share is unlikely to survive it unscathed. If Casino finally does win control of CBD, it may not be before Wal-Mart, untroubled by this turmoil, has moved into the market lead.

The Casino-CBD-Carrefour saga still has many twists and turns to come, but, whatever the eventual result, Casino looks to be facing a lose-lose situation.