Casino’s asset disposals will substantially reduce debt

Last Monday, French grocer Casino Guichard-Perrachon SA (Ba1 stable) said that it will sell €1.5 billion of
non-core assets in 2018 and 2019, which will substantially reduce its French operations’ net debt of €3.7
billion at year-end 2017, a credit positive. How the divestments will affect Casino’s parent company, Rallye,
whose credit quality Casino’s share price constrains, is unclear.

Casino has not specified which assets it will sell, only that the disposals will target French real estate and
directly owned assets. The company will complete half the disposals in 2018 and the remaining half at the
beginning of 2019. This plan complements the ongoing disposal process of Casino’s stake in Brazilian retailer
Via Varejo.

The company has confirmed that its French food retail operations’ EBIT (excluding the contribution of real
estate activities) will rise by at least 10% in 2018 from €463 million in 2017. This increase does not include
capital gains stemming from future disposals. Moreover, management has indicated that the French
division’s second-quarter like-for-like growth should be higher than the 1.3% first-quarter growth. The
growth is credit positive for Casino, which competes in its home market with retailers such as Carrefour SA
(Baa1 stable) and E. Leclerc. According to research firm Kantar WorldPanel, Casino’s market share eroded 0.1
percentage point year on year to 11.5% over the 12-week period that ended 30 May 2018.

Casino expects French operations’ net debt to decline by €1 billion in 2018 to €2.7 billion. Assuming that
€750 million of assets are sold in 2018, we estimate that France’s reported free cash flow (including interest,
dividends and exceptional items) would be about €250 million, compared with negative €378 million in
2017. Although Casino has not indicated how much debt it plans to repay with divestment proceeds, we
believe that the company will remain on track to lower its consolidated Moody’s-adjusted debt/EBITDA
ratio to 5x-5.5x from 6.0x at year-end 2017 (see Exhibit 1).

Parent company Rallye’s credit quality has deteriorated since most of its assets are composed of Casino
shares, whose price has fallen about 34% so far this year. We estimate that Rallye’s debt exceeds the value
of its assets by about €790 million (see Exhibit 2), although our calculation does not include any control
premium. More positively, Rallye’s liquidity remains good, with €69 million in cash and €1.8 billion of
undrawn credit facilities at year-end 2017. This should suffice to cover its 2018 debt maturities, including
€300 million of bonds and €375 million of convertible bonds that holders can put in October 2018.
However, we believe that Rallye would struggle to access the bond market given that its 2021 bonds
currently trade at a 10% yield.