In Order To Save His Empire, French Grocery Casino Jean-Charles Naouri Turns To His Protege

There is a good chance that it will take new management to prevent Jean-Charles Naouri's French grocery conglomerate from collapsing under the weight of its debt over the course of more than 30 years. Naouri built his empire predominantly through the use of borrowed money and financial engineering.

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Casino Guichard-Perrachon SA's future depends on whether they will reach a deal with Moez-Alexandre Zouari, who started his retailing career working under licenses with Naouri's company two decades ago, and whether they will be able to merge the two retailers together. A few people familiar with the matter believe that three people who are close to the company plan to list the company on Euronext by September of this year.

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Although the 74-year-old Naouri might be inclined to give up management of his casino company in favor of the younger man, he is trying to save it from falling into the hands of creditors since he is facing debt repayments of $3.2 billion over the next two years. In the future, Zouari may end up managing businesses that are household names in France, with thousands of shops all over the country, as well.

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Several French retailers, including the Monoprix, Franprix and Casino grocery chains, are set to be merged into the French retail operation of Casino, run by the 52-year-old Zouari, through the acquisition of stores owned by Teract SA. Last month, the two sides announced the outlines of their agreement, but the details are still to be worked out.

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A senior investment analyst at Sarria Ltd., an independent credit research firm, Tomas Mannion told the Financial Times that "teract is the only deal in town." Aside from a white knight sale, like this one, which is essentially it, there is no other option."

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In a joint effort to secure investors to provide €500 million in capital, Casino and Teract are set to seek out investors who will be willing to inject funds into the company. This task may be made easier by the fact that Teract has as its biggest shareholders the agricultural cooperative InVivo Group, telecom entrepreneur Xavier Niel, and banker Matthieu Pigasse.

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People who have been familiar with the matter, who asked not to be identified because the matter is private, indicated Bpifrance, the state investment bank that owns shares in Teract, might be one source of funds, though no talks are on the way. Teract, Bpifrance, and Casino declined to comment on the matter.

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As grocery stores face slim margins and consumers already cut back on spending in order to cope with inflation, it will be hard for them to pull together this deal. Additionally, there are many unanswered questions about the way in which the merger is supposed to work, particularly with regards to how Casino's debt will be transferred over to the new company and whether bondholders will have to consent for the merger to succeed.

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It is even more difficult now, because the near-zero interest rate environment that we have had for the past few years is now over, leaving consumers' pockets even more squeezed and making financial conditions tighter.

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It has been Naouri's commitment to ensure the new company is not overly indebted. The company has decided to limit debt to two times earnings, Zouari said. Investors, however, are speculating that Zaouri may be in charge of the company's day-to-day operations. Although no decision has been made about the person who will run it, some investors believe he will be the one in charge.

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According to Zouari in an interview, retail is increasingly dominated by discounters as well as giant food makers that make unacceptably high margins. We are going the opposite way. “We are trying to develop a high-quality food offering that will be comparable to a 5-star hotel in terms of fruits, vegetables and baked goods."

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Many investors are skeptical that they will succeed, and many are predictably betting that Casino will have to restructure their debt at some point in the future. Casino's bonds are trading at deeply distressed levels, and its shares have plunged 61% over the past year, according to the Equities Research Institute. A report published by S&P analysts on Monday stated that, although the company has enough liquid assets to meet its debt maturities by next year, its ability to meet 2025 obligations will be dependent upon a wide range of factors, including favorable economic and financial conditions, successful asset sales, and a strong cash flow.

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Among the companies Naouri controls are a number of publicly traded investment vehicles; these investment vehicles are already under the protection of the courts from creditors, because Naouri is a former investment banker.

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As an analyst at AIR Capital, Pierre-Olivier Essig believes there is no benefit to the public from Teract merging Casino's French operations with its African operations, but that it is just one more of his tricks to calm down the banks.

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It is possible, however, that if the pair manage to pull off this ambitious plan, it will cement Naouri's reputation as a wise tactician. Additionally, it could be the Algerian entrepreneur's last high-wire act before retirement if they can pull it off successfully. 

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There are many reasons why Naouri should make Teract work for him. According to market watchers, he has no choice given that a merger with a rival like Carrefour SA could lead to the loss of thousands of jobs and store closures - something that would be politically poisonous in a country where the government is not afraid of stepping in to help with corporate deals. 

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It was his reason for living that he took up gambling and he is doing everything in his power to remain a part of that legacy,” said Zouari.