Arnault Loses Touch as Carrefour Is No Hermes

By Andrew Roberts - Oct 11, 2011 5:00 AM GMT+0700

Supermarkets aren’t Bernard Arnault’s bag.

While France’s richest man and the chairman of LVMH Moet Hennessy Louis Vuitton SA (MC) has seen Hermes International (RMS) SCA surge in the year since he raided the Birkin bag maker’s stock, his investment in Carrefour SA (CA) has flopped.

Carrefour, the world’s second-largest retailer, has tumbled more than 60 percent since Arnault and Colony Capital LLC paid about 4 billion euros ($5.5 billion) for a 9.8 percent stake in 2007. Now Arnault, who built LVMH into the world’s largest luxury-goods maker via acquisitions, must wait to recoup his grocery investment or swallow his losses and run after five years over which the company's sales stagnated in France.

Arnault and Colony “got the timing wrong” on Carrefour, said Justin Scarborough, an analyst at Royal Bank of Scotland Group Plc in London. “The markets they’re in have come under huge amounts of pressure since 2008 and lots of those pressures aren’t going to go away.”

Hermes shares, meantime, have surged 33 percent since Oct. 22, the day before LVMH disclosed a stake bought with equity swaps purchased in 2008. The gain has brought Hermes's market value to 24.7 billion euros and added about 1 billion euros to LVMH’s 2010 profit as luxury demand surged among Asian consumers and investors speculated about a takeover, which Hermes’s family owners oppose.

Arnault, 62, has said both investments are strategic and he’s not seeking control of the companies. He and Colony, which together now hold 13.83 percent of Carrefour and 20.12 percent of the voting rights, announced their investment on March 7, 2007. LVMH now holds 21.4 percent of Hermes.

Herta Ham

While Hermes has a waiting list for some of its bags such as the Birkin, which retails from 5,500 euros, Carrefour is running “buy two, get one free” promotions on packets of Herta Tendre Noix Superieur ham for 2.65 euros each.

Carrefour “really needs to sharpen” its pricing and price perception to give consumers a good reason to make the trip to its out-of-town superstores, or hypermarkets, said Natalie Berg, an analyst at Planet Retail. “They have struggled on both fronts, in terms of being perceived to offer good value and offering the lowest prices.”

The retailer may report an 11 percent decline in third- quarter sales to 22.7 billion euros on Oct. 13, according to the average estimate of nine analysts surveyed by Bloomberg.

French Recession?

Carrefour gets 43 percent of revenue from France, where it controls 18 percent of the food retail market, and another 31 percent from the rest of Europe. France may enter a recession next year, Goldman Sachs Group Inc. predicted Oct. 3, as growth in the euro-area economy slows to 0.1 percent amid the sovereign debt crisis.

Blue Capital, Arnault and Colony’s investment vehicle, has three seats on Carrefour’s board, held by Arnault; Sebastien Bazin, director of Colony’s European operations who became the board’s vice president in June; and Nicolas Bazire, head of Arnault’s private investment company. All three declined to be interviewed for this story.

Arnault also invests via L Capital, a private equity fund sponsored by Groupe Arnault and LVMH. The fund bought stakes in 23 companies between 2001 and 2011, including Princess Yachts International, according to its website. Arnault also sits on the board of Lagardere SCA, France’s biggest publisher.

‘More Pain’

Getting Carrefour back on track in France will take three to four years, said Chris Hogbin, an analyst at Sanford C. Bernstein Ltd. in London. The retailer has already replaced four senior executives this year including the chief financial officer. Jose Luis Duran was ousted as chief executive officer 18 months after Arnault and Colony joined the retailer’s board. “There may be more pain before there’s gain,” Hogbin said.

Current CEO Lars Olofsson’s latest plan, which includes remodeling Carrefour’s largest stores and adjusting prices, may not be enough either, Planet Retail’s Berg said.

E-commerce and smaller stores in city centers are changing the way Europeans shop, particularly for more profitable non- food items, she said. Yet, Carrefour relies on hypermarkets for about 60 percent of sales. “They’re stuck between a rock and a hard place,” Berg said. “You could say that they’re structurally flawed.”

Carrefour forecast in August that current operating income may decline 15 percent in 2011 from a previous forecast of an increase from restated 2010 figures. The grocer, which operated 15,937 stores in 33 countries as of Dec. 31, posted restated earnings on that basis of 2.7 billion euros in 2010.

While Arnault has gained a reputation for hanging on to the majority of the brands he’s acquired in the 24 years since he took over LVMH, breaking up Carrefour may be the quickest way to recoup his losses.

Sum of the Parts

Carrefour could be worth 42 euros a share based on a sum of the parts valuation, according to Jaime Vazquez, European food retail analyst at Santander in Madrid. That’s more than twice the closing share price in Paris yesterday and 19 euros higher than his target price of 23 euros.

Not all shareholders are in favor of such a solution.

While Carrefour spun off all of discounter Distribuidora Internacional de Alimentacion SA on the Madrid stock exchange in July, the plan to list 25 percent of property assets in Europe was revived and shelved again in May following opposition from other investors, unions and squabbling among management.

A proposal to merge Carrefour’s Brazilian unit with Cia. Brasileira de Distribuicao Grupo Pao de Acucar fell through in July, leaving Wal-Mart Stores Inc. to explore a bid, people familiar with the situation said. Carrefour last year pulled the sale of units in Malaysia and Singapore after a strategic review. Meanwhile, the company is years away from any listing of its China operations, former CFO Pierre Bouchut said in July.

Investor Opposition

Knight Vinke Asset Management LLC, which owns 1.5 percent of the grocer, has already said it opposes any efforts by the retailer to sell assets outside of Europe one by one. After the collapse of the Pao de Acucar merger, Olofsson said Carrefour’s Brazil business, whose value was written down by 550 million euros in 2010, isn’t for sale.

Carrefour would need to increase profit threefold for shares to return to the price Arnault paid for them, Scarborough estimates. “That’s a pipe dream,” he said. “They’ve got to be pragmatic in terms of their prospects for the business.” Scarborough doesn’t expect Arnault to cash out yet because of the losses he would incur.

A patient Arnault could be good for Carrefour as a whole. The retailer needs to restore confidence that it’s working for all investors, Hogbin said.

“They’re at odds if one shareholder is trying to get cash out of the business. That may not be consistent with a fundamental turnaround of the business.”

To contact the reporter on this story: Andrew Roberts in Paris at aroberts36@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.