Download - Investment opportunity for Wal Mart:
Investment opportunity for Wal Mart:
Carrefour
Introduction
• Wal Mart is indisputably the world leader of the retail sector• The purchase of its challenger would make sense from an industrial point
of view:– Their retail networks prove a geographical complementarity:
• No Carrefour stores in the US• No WM stores in France
– The merger would enable cost synergies:• Cuts in head office costs• Decrease in the costs of goods sold thanks to an increasing bargaining power towards
suppliers• Carrefour is listed on the Paris stock exchange. Therefore, the purchase of
a controlling stake requires the launching of a tender offer :– Either in cash (take over bid)– Or in shares– Or in the background of a mix offer
• The market cap of Carrefour is around 36 bn € (ie: 50 bn $)
Cash offer: Balance sheet impacts• Assumed premium: 20%
– Carrefour valuation: 60 bn $ ( corresponding to an increase in the net financial debt)– Based on a 15 bn $ equity, the implied goodwill would be 45 bn $
• Carrefour would be fully consolidated by WM then WM would have to consolidate Carrefour existing debt (10 bn $)
• The implied gearing ratio is unacceptable for the banks (166% vs a target 100% ratio)
Simplified financial B/S Wal Mart Carrefour Carrefour Acquisition Restatement Consolidation$ € $ $ $ $
Fixed assets 115 971 29 642 41 920 157 891 Equity method 15 098 (15 098) 0 Goodwill 45 409 45 409 WCR (14 990) (8 872) (12 547) (27 537)
________ ________ ________ ________ ________ ________Total 100 981 20 770 29 373 60 507 (15 098) 175 762
Equity 63 242 11 861 16 774 0 (15 098) 64 918 o/w group share 63 242 10 676 15 098 (15 098) 63 242 o/w minority share 1 185 1 676 1 676
Provisions 1 831 2 590 2 590 Net debt 37 739 7 078 10 009 60 507 108 255
________ ________ ________ ________ ________ ________100 981 20 770 29 373 60 507 (15 098) 175 763
TotalGearing ratio 59,7% 59,7% 59,7% 166,76%Debt/EBITDA 1,38 1,39 1,39 3,13EBIT/net interest expense 12,0 7,1 7,1 4,77
Cash offer: EPS accretion/dilution
• Assuming a 100% shareholding in Carrefour (following a tender offer and a squeeze out), WM would:
– Consolidate 100% of Carrefour’s net profit– Pay interest expenses based on a 5% pretax cost of debt
• The following table presents the sensitivity of the EPS accretion/dilution rate to the premium offered and to the pretax cost of debt
• In spite of a significant accretive impact (6% in the base case) a takeover bid is not possible because of the constraints of the banks
Cost of debt Premium offered6,02% 0% 5% 10% 15% 20%4,5% 10,01% 9,41% 8,81% 8,21% 7,62%5,0% 8,68% 8,01% 7,35% 6,69% 6,02%5,5% 7,35% 6,62% 5,89% 5,16% 4,43%6,0% 6,02% 5,23% 4,43% 3,63% 2,84%
Share offer: Balance sheet impacts• Assumed premium: 20%
– Carrefour valuation: 60 bn $ ( corresponding to an increase in WM equity)• Based on a 45,61$ price per WM share, WM would issue 1327 million new shares
– Based on a 15 bn $ equity, the implied goodwill would be 45 bn $
• Carrefour would be fully consolidated by WM then WM would have to consolidate Carrefour existing debt (10 bn $)
• The implied gearing ratio is acceptable for the banks (38% vs a target 100% ratio)
Simplified financial B/S Wal Mart Carrefour Carrefour Acquisition Restatement Consolidation$ € $ $ $ $
Fixed assets 115 971 29 642 41 920 157 891 Equity method 15 098 (15 098) 0 Goodwill 45 409 45 409 WCR (14 990) (8 872) (12 547) (27 537)
________ ________ ________ ________ ________ ________Total 100 981 20 770 29 373 60 507 (15 098) 175 762
Equity 63 242 11 861 16 774 60 507 (15 098) 125 425 o/w group share 63 242 10 676 15 098 (15 098) 63 242 o/w minority share 1 185 1 676 1 676
Provisions 1 831 2 590 2 590 Net debt 37 739 7 078 10 009 0 47 748
________ ________ ________ ________ ________ ________100 981 20 770 29 373 60 507 (15 098) 175 763
TotalGearing ratio 59,7% 59,7% 59,7% 38,07%Debt/EBITDA 1,38 1,39 1,39 1,38EBIT/net interest expense 12,0 7,1 7,1 10,70
Share offer: EPS accretion/dilution• Assuming a 100% shareholding in Carrefour (following a tender offer and a squeeze out), WM
would consolidate 100% of Carrefour’s net profit
• The following table presents the sensitivity of the EPS accretion/dilution rate to the premium offered
• Whatever the premium on Carrefour, the share offer is always dilutive from an EPS point of view; because the PER of the target (Carrefour: 18) is higher than the PER of the buyer (WM: 15) therefore only a mix offer can be contemplated on Carrefour
WM Net profit, group share 12 343
Number of shares before acquisition 4 068 EPS before tender offer 3,03
Cost of debt before tax 5%Tax rate 35%Cost of debt after tax 3,25%(additional net interest expense) 0
Target net profit 2 710 Wal Mart net profit after acquisition 15 053 Number of WM shares
Before acquisition 4 068 New shares issued 1 327 After acquisition 5 395
EPS post acquisition 2,79EPS before acquisition 3,03 Accretion/Dilution rate -8,04%
Premium offered0% 5% 10% 15% 20%
-4,10% -5,12% -6,11% -7,08% -8,04%
Mix offer• The maximum premium which can be offered is 15% assuming a mix offer
which would be 60% paid in cashGearing sensitivity analysis
% paid in cash Premium offered71,08% 0% 5% 10% 15% 20%
0% 41,40% 40,51% 39,66% 38,85% 38,07%20% 54,94% 54,38% 53,84% 53,32% 52,81%40% 71,36% 71,29% 71,22% 71,15% 71,08%60% 91,67% 92,36% 93,02% 93,68% 94,31%80% 117,44% 119,33% 121,19% 123,03% 124,84%
100% 151,22% 155,11% 158,99% 162,87% 166,76%
EPS Sensitivity analysis% paid in cash Premium offered
#REF! 0% 5% 10% 15% 20%0% -4,10% -5,12% -6,11% -7,08% -8,04%
20% -2,00% -2,98% -3,94% -4,88% -5,81%40% 0,29% -0,63% -1,55% -2,45% -3,33%60% 2,81% 1,95% 1,10% 0,26% -0,57%80% 5,59% 4,82% 4,05% 3,28% 2,52%
100% 8,68% 8,01% 7,35% 6,69% 6,02%
Debt/EBITDA sensitivity analysis% paid in cash Premium offered
207,74% 0% 5% 10% 15% 20%0% 1,38 1,38 1,38 1,38 1,38
20% 1,67 1,68 1,70 1,71 1,73 40% 1,96 1,99 2,02 2,05 2,08 60% 2,25 2,30 2,34 2,38 2,43 80% 2,54 2,60 2,66 2,72 2,78
100% 2,83 2,91 2,98 3,05 3,13
EBIT/net financial expenses sensitivity analysis% paid in cash Premium offered
714,32% 0% 5% 10% 15% 20%0% 10,70 10,70 10,70 10,70 10,70
20% 8,86 8,78 8,71 8,64 8,57 40% 7,56 7,45 7,35 7,24 7,14 60% 6,60 6,47 6,35 6,24 6,13 80% 5,85 5,72 5,59 5,48 5,36
100% 5,25 5,12 5,00 4,88 4,77