Cnova: How to make your IPO fail in seven steps

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.