Case study Group 7 : Carrefour S.A.

In the summer of 2002,with total sales of (euro) EUR53.9 billion from more than 5,200 stores, Carrefour S.A. was Europe’s largest retailer. Over the past four years, Carrefour’s growth had occurred almost entirely outside France and included several large acquisitions. In the past, Carrefour management had generally financed company growth through securities denominated in the currency of business operations. Its investment banks, Morgan Stanley and UBS-Warburg, however, had recently suggested that Carrefour consider borrowing in British pounds sterling in order to take advantage of a borrowing opportunity in that currency.With a debt-financing requirement of EUR750 million, the bond issue would be one of Carrefour’s largest. Now, in August 2002, the investment bankers expected that the 10-years Carrefour bonds would be priced at a coupon rate of 5 ¼ in euros , 5 3/8 in British pounds, 3 5/8 in Swiss francs, or 5 ½ in U.S. dollars.

Carrefour
In 1963, Carrefour altered the world of retailing with the introduction of the “hyper-market” concept in the small French town of Sainte-Genevieve-des-Bois, southeast of Paris. This format combined a supermarket , drugstore, discount store ,and gas station into one massive, one-stop-shopping megastore. The original store had 2,500 square meters of retail space, 12 checkouts, and 400 parking spaces. The company expanded rapidly in France and beyond, opening its first store outside France (Belgium) in 1969, and outside Europe (Brazil) in 1975. In addition to strong organic growth, Carrefour pursued selective acquisition, including notable mergers with Euromarche and Montlaur in 1991, and Promodes in 1999. Exhibit 1 provides a history of Carrefour’s store portfolio from 1992 to 2001.

Carrefour was profitable in all major operating regions. In 2001, the company fenerated operating profits of EUR2.8 billion on total net sales of EUR69.5 billion. Of that profit, 5% originated in Asia, 2% originated in Latin America and 26% originated in Europe outside France, with the remainder of profits coming from French operations. The regional-sales breakdown was 7% from Asia, 12% from Latin America, and 32% from Europe outside France. For Carrefour, 2001 was the first year that total sales outside France exceeded total domestic sales. Carrefour was the largest retailer in France , Belgium , Greece , and Spain. Exhibit 2 details Carrefour’s consolidated financial statements. The company expected to maintain its expansion trajectory. Carrefour’s CEO, Daniel Bernard, stated his expectation that, in 2002, that company would increase sales by 5% on constant exchange rates and increase recurring net income by 10-15%. He asserted that the company continued to gain market share in most of the countries where it operated, notably in Italy , Belgium, Brazil, and Argentina. Carrefour re-launched its expansion in China, with the opening of a store in Chengdu in June.

Carrefour’s Financing Policy
In each country, Carrefour operated primarily within the local economy when buying and selling products. Foreign-currency exposure on imported goods was generally hedged through currency-forward contracts.

In 2001, total Carrefour borrowings were EUR13.5 billion, of which EUR6.4 billion were in publicly traded bonds. Carrefour’s debt was denominated in many currencies. Exhibit 3 details the recent composition of Carrefour’s borrowings by currency. Foreign-currency borrowing was generally hedged so that total debt requirements were currently 97% in euros.

Current Market Opportunities
As Carrefour management considered the bond-denomination decision, it also considered the current inflation, interest-rate, and exchange-rate environment. Over the past three years, long-term bond yields had declined in all four currencies. The Swiss franc’s interest rate, however, had consistently been the lowest rate. The decision also hinged on future movements in exchange rates. Over the past five years, the euro had depreciated against most major currencies. Should this trend continue, paying down foreign-currency debt with euro-denominated cash flow would become increasingly expensive. Exhibit 4 , 5, and 6 provide information on trends in inflation , government-benchmark bond yields, and exchange rates in the various currencies. Exhibits 7 and 8 provide information on prevailing current spot exchange rates and the yield curve.