Talking shop: Carrefour's Guyenne et Gascogne dilemma

By Sam Webb | 13 December 2011

Carrefours acquisition comes at a difficult time for the retail monolith

Carrefour's acquisition comes at a difficult time for the retail monolith

Carrefour, the world's second-biggest retailer, is set to buy its French retail franchise partner Guyenne et Gascogne in a deal worth nearly half a billion euros. The move raised eyebrows across the retail sector, considering the supermarket giant's domestic woes. Sam Webb reports.

Yesterday (12 December) French retail giant Carrefour announced it was putting together a bid for its main franchise retail partner Guyenne et Gascogne, ending days of speculation.

Numerous business media have said Carrefour faced pressure from major shareholders at Guyenne et Gascogne, which operates six Carrefour hypermarkets and 27 Carrefour Market stores in France, who threatened to sell their stake to a rival domestic retailer if Carrefour did not step in.

Cliona Lynch, senior retail analyst at Verdict Research, believes Carrefour had little choice to acquire the franchise partner as it has to remain strong in its home market, where it has had a challenging year.

Carrefour has issued a number of profit warnings this year due largely to falling sales in France, where the retailer launched a new "action plan" to revitalise its domestic business. The problems in France have led to uncertainty over the future of CEO Lars Olofsson, with some shareholders demanding changes to the way the retailer is run.

"It's an interesting situation. It's something Carrefour needed to do as they are having a difficult time in their core French market and they couldn't have afforded to lose control of Guyenne et Gascogne," she said.

"Carrefour needs to focus on France, it's a huge part of their business. Like Tesco, they need to perform in their home market in terms of profitability."

"But it's going to hurt Carrefour as it is in such a difficult situation and investors are already worried. While it was necessary, it was a difficult move. It's a bit of a case of damned if you and damned if you don't.

The offer, which will comprise cash and share options, is believed to be for around EUR493m (US$650m).

Retail analyst and blogger Richard Lewis is also undecided about the move. He acknowledges that Carrefour needed to cement its position domestically but queries the price it is willing to pay to acquire Guyenne et Gascogne.

"I understand Carrefour's desire for better control over its stores, brand and reputation and the need to gain some operational synergies. With the pressure it is under in France (and Spain), getting its house in order is vital; consolidating operational ownership will help," he said.

"However, the retailer has paid nearly 20 times EBITDA for Guyenne et Gascogne. This sets the bar rather high in terms of return on investment, I would think."

Sanford Bernstein analyst Christopher Hogbin also sounded an alarm over the price and claims that the acquisition does not make sense on its own merit considering the retailer is struggling with the hypermarket format in France.

It said: "Strategically, these deals reinforce Carrefour's exposure to a structurally-challenged hypermarket format in a mature market. With the businesses already fairly operationally integrated we expect little synergy from the acquisition, and with Guyenne et Gascogne's recent sales performance mirroring that of Carrefour's French operations - perhaps unsurprisingly given it is a franchisee - there is little to suggest there is much scope of best practice sharing between the businesses."

The note appears to back claims that Carrefour was concerned about what major Guyenne et Gascogne shareholders the Beau family, which holds a 21.3% stake, and private-equity firm First Eagle, were going to do with their shares.

"The deal seemingly has been triggered by the end of Beau family's four year lock-up period which ends on 15 December," Hogbin said.

However, Hogbin did point out that the deal is fairly small in the overall context of Carrefour and estimates the deal will only dilute shares 1%.

The offer for Guyenne et Gascogne was not the only piece of M&A announced by Carrefour yesterday. It also announced its intention to divest its 50% stake in Altis, a franchise venture it owns with Spanish retailer Eroski, a move many industry watchers believe is to help finance the Guyenne et Gascogne acquisition.

Within hours, rival Intermarché said it was in talks with Eroski to buy the whole of Altis, which operates six hypermarkets ten supermarkets and four hard discount stores in south-west France on a franchise basis for Carrefour.

Lynch applauded Intermarché's move, adding: "It may prove a good move for Intermarché to make that leap on the back of Carrefour's exit".

Whatever the reasons for Carrefour's acquisition plan, once the sale goes ahead it needs to look at ways it can effectively integrate its smaller partner into its existing operation, before once again focusing on alleviating its domestic market woes.

Sectors: Mergers & acquisitions, Retail

Companies: Carrefour, Guyenne et Gascogne, Tesco, Eroski

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