Groupe Casino’s financial metrics continued to decline in 2022, reporting its smallest topline and slimmest profit in its core market in five years. The only growth for the France-headquartered Supermarket group came from Latam, but this failed to offset muted performance elsewhere.

This is a bad time for Casino to underperform in terms of operations, cash flow generation and deleveraging, as the group faces a large maturity wall (€1.4bn in 2024 and €1.8bn in 2025) in France alone. The challenge becomes even more daunting when you consider that Casino is also on the hook for repaying the €1,992m of 2025 maturities sitting at its parent HoldCo, Rallye, which was restructured via a contentious Sauvegarde in 2019.

Casino must increase its cash balances and drive leverage low to be able to dividend up funds to meet Rallye obligations. Alternatively, it must offer a more compelling option than previous attempts to buy back its HoldCo Rallye unsecured debt at hefty discounts, that received a poor take-up from bondholders.

In its core home market, weak consumer sentiment and high competition weighed on volumes in France. At the same time its ambitious store expansion plan put pressure on Capex investment and on the debt pile, while high interest rates hurt its predominantly variable debt. Cash interest expense has nearly doubled in the last four years and we estimate that the share of variable debt has doubled to 67%. This led to a record €1.9bn FCF burn per 9fin calculations in FY 22 (Figure 7) with no clarity when this will reverse.

While management plans to cut costs and reduce inventories in 2023, impact on cash flow will be modest at around €440m. Their efforts will mainly focus on growth through store rollouts and completing more disposals. However, Casino has mostly failed to achieve its strategic goals until now, so it is likely that its current efforts will not be big/fast enough to deal with the looming maturities and operational issues.

As a result, the majority owner of Casino, Jean-Charles Naouri, has come up with a plan to unlock value through a proposed merger with Teract, which will likely involve further heavy financial engineering and the ripping-up of Casino's complex existing organisational and corporate structures.

Investors are wary and may be unwilling to take a gamble on Casino, despite its debt trading at distressed levels. Getting to grips with the numbers which are heavily adjusted with a number of exceptional costs and addbacks is one challenge, as is working out asset coverage as the restricted group is predominantly made up of the underperforming French business, with a number of real estate transactions in recent years reducing collateral cover.

Conversely, Casino has proactively sought to deal with its debt pile in the past, via a series of tenders and liability management exercises to take advantage of depressed prices, funded from disposal proceeds. But most proceeds have been applied toward increased capex, rather than debt reduction.

In this report we will look into more detail at the issues facing Groupe Casino focusing on:

• Proposed merger with Teract
• Situation at Rallye - Sauvegarde protection and upcoming debt maturity
• FY 22 financial performance
• The business strategy and have they delivered in five years?

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