Over the last months, I have looked at the
stock reputation of many companies. I take this opportunity to share with you a
case that I find very interesting.
For those who do not know, Cnova is a growing
company and one of the e-commerce leaders in France and Brazil. Majority owned
by the Casino group, a French mass retailer, Cnova was listed last November at
half its targeted value (EUR2.3bn realized versus EUR4.1-4.6bn hoped initially).
Despite that, the company’s share price has lost 25% since the IPO and is
valued today at less than 0.5 times sales. E-commerce players are generally traded
at least two times sales.
One: Undertake an IPO for the wrong reasons
Officially, the main goal of the IPO was to
create Cnova as a company in its own right - an ecommerce pure-play - and
consequently accelerate its growth. Reality, however, was different. Cnova did
not need to raise capital to finance its growth and still remained dependant upon
the Casino group (e.g. purchasing, logistics…). The only achievement of the IPO
was to highlight to investors the undervaluation of the Casino group.
Two: Put in place a poor corporate governance
structure
To make sure Cnova remained under its control,
Casino put in place a governance structure unfavorable to minority investors. The
Cnova Board of Directors is mainly composed of non-independent managers
representing Casino. The group has not unified the management and instead maintained
two separate CEOs at the top of Cnova (one in France, one in Brazil). It has
multiplied management changes (CFO, General Counsel, IRO…). Finally, it has
really not aligned the incentivization of the Cnova management with its share
performance (no share ownership or stock-options).
Three: Limit the number of shares available to
the market
Again, in an effort to retain control, the
Casino group has maintained the highest possible level of ownership in Cnova.
Less that 7% of the equity was offered to investors. Once a few large
institutional investors obtained shares, there were not enough shares remaining
in the market to ensure an appropriate level of liquidity.
Four: Chose the wrong listing
In order to benefit from the Alibaba IPO in New
York, Cnova did its transaction on the Nasdaq. By doing so, Casino excluded
French and European investors who should have represented the natural
shareholder base of the Franco-Brazilian company. Also, American investors, for
whom Cnova was only a small foreign company and an option in their portfolio,
did not rush to participate in the IPO.
Five: Hire too many “prestigious” advisors
For this IPO, Casino hired no fewer than ten
investment banks, including Morgan Stanley, JP Morgan, and Merrill Lynch. As
well as expensive (EUR16m representing 30% of the net losses in 2014), this
glut of advisors was counterproductive. Fighting for their position within the
syndicate, investment banks could not take the risk to correctly advise Casino.
Indeed, acknowledging a mistake to the client could potentially result in a
downgrade within the syndicate.
Six: Don’t be transparent
Just like many corporates who are apprehensive and
limit what they say to the market in order to avoid making any comments on
their real performance, Cnova did not disclose critical and key indicators.
Namely: 1) the profitability split between France and Brazil and 2) the
financial details of its payments to Casino resulting from its agreement with
the mother company. On this last point, without a precise and fully transparent
disclosure, Casino will always be suspected of taking advantage of its
relationship with Cnova.
Seven: Oversell your results
Under the pressure of a poor share price
performance, it can be tempting to oversell results. In Q1, Cnova proudly
highlighted a gross margin improvement of 18 bps, whereas its operating losses
deepened from EUR7m to EUR48m. Cnova has not yet published it Q2 earnings but focused
already on the strong growth of its activities and revenues. In reality, its
sales increased by 11% compared to 18% growth in the previous quarter.
Since the beginning of the year, Cnova has been
trying to correct its mistakes. The company opened a Euronext listing,
recruited a new Investor Relations officer and asked Exane BNP Paribas to
increase its liquidity. This is good news but far from enough. If Casino wants Cnova
to be valued two times sales, the group would have to completely change its
overall approach. A change is clearly achievable but only if priority is given
to shareholder value.
