2014 rallye casino

8/10/2019 2014 Rallye Casino

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10th annual new york

value investing congress

September 8, 2014 New York, NY

An Owner-operator to Rally Around

Marcelo P. Lima, Heller House


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An owner-operator to rally around

NY Value Investing Congress September 8, 2014Marcelo P. Lima [email protected] +1 (305) 520-9855
mailto:[email protected]:[email protected]


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Legal Disclaimer

All information provided hereinis forinformational purposes only and should notbe deemed as a recommendation to bmentioned.

This presentation contains information and analyses relating to some of the Heller House funds positions during 201currently or in the future buy, sell, cover or otherwise change the form of its investment in the companies discussed inany reason. Heller House hereby disclaims any duty to provide any updates or changes to the information contained helimitation, themanner or type of any HellerHouseinvestment.

Past performance is not necessarily indicative of future results. All investments involve risk including the loss of princassumed that any of the securities transactions or holdings discussed herein were or will prove to be profitable, orrecommendations or decisions we make in the future will be profitable or will equal the investment performance of theherein. Specific companies or securities shown in this presentation are meant to demonstrate Heller Houses investmenof industries andinstruments in which we investand arenot selected based on past performance.

The analyses and conclusions of Heller House contained in this presentation are based on publicly available informrecognizes that there may be confidential or otherwise non-public information in the possession of the companpresentationthat could lead these companies to disagree with Heller Houses conclusions.

The analyses provided include certain statements, assumptions, estimates and projections prepared with respect to, amhistorical and anticipated operating performance of the companies. Such statements, assumptions, estimates, and projeassumptions by Heller House concerning anticipated results that are inherently subject to significant economic, councertainties and contingencies and have been included solely for illustrative purposes. No representations, express orto theaccuracy or completenessof such statements, assumptions,estimates or projections or with respect to anyotherm

This document is confidential and may not be distributed without the express written consent of Heller House and dooffer to sell or thesolicitation of an offer to purchase anysecurity or investment product.


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Our presentation today:Well be talking about a retailer

1 main security (and lots of related ones) Over $2 billion market cap (controlling assets worth over $10 bi

Growing fast, long runway, excellent management

Hard catalysts for value realization

Bargain price: would be worth 42% more today if liquidated

Potential upside of 200-300% over the next few years as story p

its a bit complicated, so please bear with me


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Lets talk about retail

Physical retail is dead! (Right?) Just read the headlines: WSJ, Shoppers Are

Fleeing Physical Stores (Aug 5) and TheGreat Mall Exodus (Aug 6)

Marc Andreessen: Software eats retail.*

*Source: http://pando.com/2013/01/30/andreessen-predicts-the-death-oftraditional-retail-yes-absolute-death/


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And yet

In Kowowecitret

Photo of the Myeongdong shopping district, taken May 17, 2014


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Another example


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Selfridges

Opened in 1909 Just four locations

Thriving: generated488m in sales and a15% pre-tax margin in

2012*

*Source: FT, Selfridges doubles dividend to owner despite fall in profits


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The reality is

Ecommerce sales are only 6% of all retail sales Half of ecommerce sales are actually going to retailers with phy

stores*

Anecdotal: physical shopping is still a pleasant, entertaining, fuactivity, which lets you discover things you didnt expect or kno

about Conclusion: retailers that adapt and successfully integrate phys

and online will thrive

*Source: http://blogs.hbr.org/2014/08/e-commerce-is-not-eating-retail/


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Back to the future

Online-only retailers are starting to seek outphysical stores

Shoppers suddenly paid more attention toun-flashy pieces often overlookedonline. More women bought multiplenecklaces that could be worn together. Andperhaps most importantly, co-founderDaniella Yacobovsky said shoppers typicallypurchased three times as much merchandiseas an online BaubleBar customer. Havingthe opportunity to touch and feel ourproduct is a big value, Yacobovsky said.*

*Source: http://www.washingtonpost.com/news/business/wp/2014/08/19/online-shopthe-future-so-why-do-so-many-web-retailers-want-to-be-in-stores/


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Now, lets talk about food retail

Food retail is changing, operators must embrace ecommerce Analytics and competitive prices more important than ever

Focus and strategy are critical; low margins means mistakes areamplified

Despite all this, food retail is the least affected by technologicachange, making it much more stable than other types of retail


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Grocery least affected by ecommerce

Source: Tescos Winning in the new era of retail presentation


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but very affected by mismanagement

Tesco is a good case study of a food retailer that lost focus and to react to the changing landscape


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Tescos missteps

Expansion into US (at a cost of over 1 billion) and China broke tsuccessful formula of making money in the UK and reinvesting there to benefit UK customers*

Didnt react quickly enough to lower its fat margins at home,allowing competitors to become stronger - German discountersand Lidl thrived

Failed to appreciate trend towards smaller top-up baskets, morfrequent trips to convenience formats

Very high exposure to large stores (66% by retail space excludinstores smaller than 10,000 sf) results in lower sales densities aninefficient use of capital**

*Source: FT, The inside story of how Clarkes tenure at Tesco came to an **Tescos Winning in the new era of retail presentation


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Tescos missteps - continued

Spent money on Blinkbox, amusic-streaming service,Mobcast, a digital book store,the restaurant chain Giraffe,and launched the Hudl tablet

And of course it has four

corporate jets*

The result:

*Source: FT, Tesco flies into trouble over its corporate jetsImage: FT, Tesco chief Lewis faces heavy to-do list to turn round retailer


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A retailer that gets it


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Our idea today:Groupe Casino, a global retailer

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What is Casino?

Thats a good question does anybody k

Sell side: We view Casino as a Frenchgroup mainly.

J.P. Morgan Cazenove Europe Equity Research, October 10, 2013


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Casinos sales

Heres what the sell side sees:

True, Casinos sales on aneconomic, look-through basisare predominantly French

Total 2013 sales: 30.12 billion

Given IFRS, Casino fully consolidates the sales of partially owned subsidiaries. This is an ecview of 2013 sales in euro, excluding Mercialys. Source: Company filings, Heller House esti


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Casinos look-through earningsHeres what matters:

On a look-through basis, 65% ofCasinos profits come fromabroad.

And theyre growing muchfaster.

For 2013, in euro. France includes ecommerce and Casinos share of Mercialys. Includes TGPA. Deducts parent company debt service. Source: Company filings, Heller House estim


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France Brazil Colombia


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Market value:Is it really a French group?

10.7 billion outside of France.Snapshot at 8/31/2014, portion owned by Casino only, including TRS.


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Casinos sales

Being paid to own France

Given IFRS, Casino fully consolidates the sales of partially owned subsidiaries. This economic view of 2013 sales in euro. Source: Company filings, Heller House estimate

With a market cabillion and holdin11.42 billion (1which are in Brazand Thailand) thevalue of Casinosbusiness is negatbillion

Being paid to ow


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It wasnt always this way. Back in 20

Source: Company filings, Heller House estimates*Includes holding in Super de Boer, for 244 million, not shown (since dive


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In 2007, market ascribed positive valto French businesses

With a market cap of 8.34 billion and holdings worth 3.89 billthe implied value of Casinos French retail business back in 20074.5 billion

Since then, the value of Casinos holdings grew by 194% whileCasinos market cap is up only 23%

Current environment in France has something to do with thiwell see how the fast-growing subsidiaries will drive returnsregardless of what happens in France


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The man behind it all(and this is important)

I used to talk to Bill [Gates] all the time, Id always use this expression that a ham

sandwich could run Coca-Cola.*

~Warren Buffett

Except food retailers arent Coca-Cola.

You need more than a ham sandwich to run them.

*Source: Snowball: Warren Buffett and the Business of Life, by Alice Schr


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Jean-Charles Naouri biography (cont

Subsequently, studiedeconomics at Harvard for

two years on a scholarship Obtained a perfect score

on the LSAT beforereturning to France andattending the coleNationale dAministration*

Served as chief of staff forPierre Brgovoy,Minister of Economy andFinances from 1982-1986

Architect of Frenchfinancial markets reform(futures, options, andcommercial papermarkets)

*Source: WSJ, Brazil's New Retailing King Has the Enemies to Prove It


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Jean-Charles Naouri biography (cont

At age 38, joinedRothschild & Cie Banque

as Managing Partner Established his

investment fund Euris,with help from DavidRothschild. Euris was aningeniously structuredholding instrument thatallowed it with a

relatively small initialplacement to controlsignificant shares of blue-chip companies such asLOral, Canal Plus, andCarrefour.*

*Source: The French Rothschilds, by Herbert Lottman


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Putting Casino together

Naouri used his fund Euris to take over Rallye, a struggling retain 1991

In 1992, he swapped Rallyes assets for shares of Casino GuichaPerrachon, founded in 1898 by Geoffroy Guichard

In 1997, fended off a hostile offer from Promods, kept control

Also in 1997, bought a stake in Monoprix (France)

1999: bought stakes in Thailands Big C, Colombias Exito andBrazils GPA

2000: bought a stake in Cdiscount (ecommerce)


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Epic battles for control

Over the years, Naouri had epicbattles with the families of thevarious companies he took over(Monoprix, GPA, Franprix andLeader Price)

Known as a tough negotiator

Consolidated full control overall holdings over the years

Naouris most public battle was thAblio Diniz, whose family foundedPo de Acar in Brazil


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Naouris superior long-term strategy

Naouri understood early on that retail was moving away from mand into precision commerce; tailored offering to customers aacquired footholds in proximity, convenience, high and low end

He also realized that growth at home would be difficult, and focCasinos portfolio in the most promising emerging markets

Dual retail/real estate strategy: every time Casino builds a big st

France or abroad, it builds a shopping center around it. This crehigh quality rental income from surrounding tenants and is a heas retail trends move away from big boxes.

Strong in private label, offering innovative (instead of me tooproducts to better compete with brands


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The result

T-1


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Source of growth:

Casinos foreign holdings


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Grupo Po de Acar (GPA) Brazil

Brazils largest private employer, leader in food and non-food re Operates 1,999 stores across 30.1m square feet, plans to grow f

retail portion by 57% over next two years

2013 same store sales growth of 9.0%, net sales up 12.8%

Expanding GLA of shopping centers by 20% per annum

Growing network of convenience banners

Plans 650 new stores by 2016, equivalent to 4 new stores per we

Publicly traded, on a forward P/E of 16-17x based on 2015 estim


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GPAs steady growth over the years

Source: Casinos 2013 full-year presentation


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Via Varejo Brazil

New name for two well known Brazilian non-food retailers CasaBahia and Ponto Frio, both top-of-mind in terms of brand recall

In aggregate they sell more than their next four competitorscombined (26% market share and growing)

Difficult to replicate: dense distribution network with over 9m s

distribution centers and a fleet of 2.6 thousand vehicles makingthousand deliveries every day

Publicly traded and 43.35% owned by GPA (62.3% of voting righ


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Via Varejos exceptional opportunity Brazil

Source: GPAs 2013 investor day

Brazpenegrow


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Grupo Exito Colombia & Uruguay

Leader in food retail in Colombia with 40% market share Operates 470 stores in Colombia, 54 in Uruguay

Recently announced the acquisition of 50 stores from Super Intcompetitor in Colombia

Growing middle class means the opportunity to expand formal

an additional 200 towns across the country

Over past ten years, consolidated sales have grown at 16% CAG

Publicly traded, on a forward P/E of 20x based on 2015 estimate

*Estimate by JPM Chase


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Exitos steady growth over the years



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Casinos strong Latin American brands5 in the top 20

Source: El Pas, De compras por Amrica Latina


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Big C Thailand & Vietnam

Thailand: owns 559 stores and 127 shopping malls; co-leader with Teshypermarkets

Half of EBIT comes from shopping mall rents

11% CAGR in sales since 1997

Low proportion of modern retail in the country (44%) compared withdeveloped Asian countries at 95%

Substantial growth ahead: over next three years will double hyper ansupermarket store count, double the number of shopping malls, and convenience format store count

Publicly traded, on a forward P/E of 20x based on 2016 estimates*

Vietnam: privately held by Casino, licenses Big C name; only operatorhypermarket and shopping center segment

*Source: Bloomberg


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Big Cs steady growth over the years



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Tailwinds in emerging markets


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Megatrend: the advent of a new consumclass in emerging countries

Source: McKinsey Global Institute, Winning the 30 trillion decathlon - 2012


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Large populations

In aggregate, Casino is present in countries with 523 million inh

Low urbanizations of Vietnam and Thailand are a tailwind for mretail


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Favorable demographics: Young countri

Percentage of population ages 24 and under:

Source: CIA World Factbook, 2014 estimates


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GDP per capita has substantial runway

GDP per capita in the foreign countries in whichCasino operates is behind more developed countries

Shown in 2013 dollars:

Source: World Bank for all countries except US (St. Louis Fed) -http://data.worldbank.org/indicator/NY.GDP.PCAP.CD


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Brazil is back in the 1940s

Brazils GDP percapita, adjusted forinflation, is wherethe USs was backin the 1940s

Brazil today:

$11,208 US in 1947: $13,513

(2009 dollars)

Source: http://research.stlouisfed.org/fred2/series/A939RX0Q048SBEA


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The 50-year snooze

Over the past 50 years, BrazilsGDP per capita growth haslagged other emerging peers

The upshot: there is a lot ofpotential upside as wealth percapita increases

Source: The Economist, The 50-year snooze


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Potential catalyst to wake up Brazil

Coming up: October elections Broad discontent with incumbent

president Dilma

Growing support for newcomerMarina Silva

A win for Ms. Silva [] could spur adevelopmental leap for Brazil, whichembraced democracy in 1985 after along dictatorship but has struggled with corruption and inefficiesince.

Source: WSJ, Brazils Silva Taps Voter Discontent


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Naouri betting big on Brazil

R$ 2 billion (US$ 800 million) earmarked for 2014 expansion

Quote from 2013 Q4 conference call:

In Brazil, the investments are planned for 2014 to stability c2013 doesn't mean that we're going to slow down CapExambitions are considerable. We want to expand very rapidly in Brwe believe that the potential of GPA is huge. GPA really, Bracontinent than a country, and we believe that the expansion of Gcash-and-carry Assai format, in particular, and Minimerconvenience stores have a lot of potential for the future. So, weambition for Brazil, and we are going to spend R$2 billion andpursue a very dynamic development strategy in Brazil.

Source: Casinos Q4 2013 conference call transcript, Bloomberg

f i k h i f


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Summary of emerging market thesis forCasino

Large populations, growing wealth per capita, growing middle

Large number of consumers reaching tipping point where increwealth translates into discretionary purchases and higher marg Example: In Brazil, GPA converted an entire neighborhood from their low

banner to more upscale Po de Acarbecause the average income had rtipping point and conversion resulted in high return on capital

Within this growth in population and middle class there is additpenetration of formal retail

Fast growth into underpenetrated urban areas will result in addstores, shopping centers, faster SSS and rising rents

Source: Casinos Q4 2013 conference call transcript, Bloomberg


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Lets take a look at France


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Tepid growth, good strategy

Naouri has long said that the French market has little growth

Instead, whats shifting is buying patterns: hypermarkets are ouconvenience city-center formats are in

In 2005, Casino spun out Mercialys, a REIT containing the shoppcenters surrounding its hypermarkets

It has been a very successful strategy, as the big boxes are convto additional shop space


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Mercialyss Grenoble shopping center

C i i i i t l b l


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Casino was a pioneer in private labelWhy is it so important?

Private label was the original way of selling goods: by the 1930s, retathe largest in the world, and was responsible for the quality of the pro

With the advent of radio broadcasting, advertising was used by brandcustomers into retailers, shifting the power from retailers private bramanufacturers, who were now held responsible as agents of trust w

Competition among retailers turned brands from profitable, to sold aeventually to loss leaders, in order to attract customers

With improvements in technology and logistics, it made sense for retcommission exclusive products which they could price competitively much higher margin, shifting power back to retailers

With retailers controlling the customer interaction, five of the top eigmanufacturers are now retailers (Unilever and Coca-Cola are not even

*

Atlantic and Pacific Tea Company**

Fast-moving consumer goodsSource: Store Wars by Greg Thain and John Bradley

O f th fi t l f b d


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One of the first examples of a brandeproduct: Ivory soap, 1886

Examine before you buy ProctGamble were nudging grocers to ssoap so their customers wouldnt buying soap of a lesser quality

Eventually, P&G cut out the midd(distributors) and dramatically gre

force, becoming a strong influencof sale


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Private label today

In the US and Europe, during 2000-2010, private label was respofor the majority of growth in packaged foods

Private label share of FMCG sales approaches 20% and growth surpassed that of manufacturers brands in 9 of the last 10 year

Example: in 2005, best-selling brand in US grocery market wasWalmarts Great Value brand

Penetration varied by country. Highest is Switzerland (47%), witat 29%; Brazil is a mere 8%, which spells opportunity for GPA

Source: Store Wars by Greg Thain and John Bradley

O i f F h b C i


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Overview of French banners: CasinoSupermarkets

Casino Supermarkets: 410 stores, average sales areaof 17,200 sf, private label penetration is 36% of sales


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Monoprix

584 stores, very attractive formatboth from a shopping experienceperspective, and with the highestoperating margin, at 6.9% in 2013

Offers both food and non-fooditems

40 new stores opened in 2013

Strong private label strategy


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Franprix

885 stores theunavoidableconvenience store

Naouri: It isdifficult to replicateby anyone in Paris.

Source: Franprix website, March 2014


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Franprix very convenient


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Leader Price

619 stores; mission of selling quality products ataffordable prices

Stocks 700 items year-round at less than 1

More affordable thanhard discountcompetitors

Only sells nationalbrands if economicssimilar to privatelabel


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Lots of options within walking distan

Walking around Paris,there are manylocations dominatedby Casinos banners

This is a few blocksfrom the Arc de

Triomphe and Ave desChamps Elyses

Champs Elyses

a couple of blocks away


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Summary of French thesis for Casino

No growth overall, just a shift from

Casinos hypermarket format toconvenience (Casino, Monoprix,Franprix/Leader-Price, Petit Casino,Vival and Spar)

Analysts have been worried aboutCasinos hypermarket banner, Gant,due to high prices; that has now beenremedied and Gant has the lowest

prices among all competitors Shift to convenience could benefit

Casinos margins over time

Any return to GDP / employmentgrowth would be icing on the cake

Source: Casinos Q4 2013 results


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Casinos real estate holdings


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Casino owns substantial real estate

Like many retailers, Casino owns substantial real estate

Unlike many retailers, Casino has been adept at actively managholdings and highlighting value through spinoffs and asset swaMercialys

Casino owns 4.2 billion of real estate in France, primarily in hyand Monoprix stores

In addition, Casino owns 1.25 billion of real estate abroad, primThailand and Colombia

Has indicated a desire to spin off a REIT in Thailand

Growth in Brazilian malls could create a REIT in a few years

Estimates by Heller House, on an economic, not fully consolidated basisSource: Company filings


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A detailed lookat Casinos valuation

Lets properly value the French busin


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Let s properly value the French businComparable multiples

Universe of similar retailers trade at vast multiples from 0.26x evalue to sales (Safeway) to 1.69x EV/S (Big C), with multiples socorrelated to operating margins

B


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Valuing the French business today

Using 0.50x EV/S for the French business, we arrive at EV for the Fren8.16 billion

This counts French sales at 16.3 billion, which excludes the portion oattributable to ecommerce and unlisted foreign subsidiaries

Unlisted foreign subsidiary sales: Argentina 428 million (we value at 0.25x sales due to current econ Vietnam 468 million (we value at 1.5x sales due to growth profile)

Indian Ocean 862 million (we value at 0.5x sales, in line with Frenc Total French + unlisted subs: 9.4 billion EV

Plus current market value of listed subs (11.4 bn): 20.8 billion EV

Less parent company net debt of 6.9 billion, we get 122 per share, values the French business today (Casino has 113.1 million shares)

Source: Company filings, Heller House estimates; Casinos sales andnet debt at 12/31/2013


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Perhaps too much?

The problem with using EV/S of 0.50x for the French business is

we estimate the French EBIT margin is 3.1%, skewed down by tmargin hypermarket business

This results in an EV/EBIT multiple of 16x, higher than comps at

In 2013, Franprix and Leader Prices operating margins were 3.5Monoprixs were 6.9%

Food deflation in France and price cuts at Leader Price may lowmargin in 2014

If Casino can shift more of its sales to the higher margin bannershrink hypermarkets over time, there is an opportunity for the mto award its business a better multiple



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Using EV/EBIT instead

If we apply a 13x EV/EBIT multiple for the French business inste which is at the high end of comps and one turn higher thanCarrefour we get EV for the French business of 6.55 billion

Adding up the value of the listed and unlisted subsidiaries, totaEV is 19.2 billion

Less parent company net debt of 6.9 billion, we get 108 pershare for Casino, fair valuing the French business

But these methods tell us what Casino is worth today, not whatits worth in the future

There is also the additional value from the 4.2 billion in realestate (37 per share or 41% of Casinos market cap) what wouit be worth if monetized?



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Conclusions drawn from this exercise

Casino has assembled an impressive array of assets over the

years, but as a result, it has also accumulated a lot of debt(although on a consolidated basis, net debt to EBITDA is 1.6x,down from 3.8x in 2005)

Control battles are over: in order to highlight the value of CasinFrench business, Casino should focus on deleveraging

With parent company net debt of 6.9 billion, a substantialamount of value would accrue to Casino shareholders as debt ispaid down

However, this analysis is static; its more important to look athe value Casino will create in the next few years

A better way:


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A better way:Look-through earnings methodology

Start with French and unlisted subsidiaries sales, excluding eco

and apply the current estimated EBIT margin of 3.1%. Grow saleyear to be conservative.

Estimate Casinos parent company debt service (current bondsoutstanding of 8.4 billion this includes Casinos deeply suborperpetual bonds, which it treats as equity, and Monoprixs convbonds)

We believe the average cost of debt is 4.1% and debt service is

Apply French statutory tax rate of 34.43% to arrive at net incomfor France

Bonds outstanding estimated at 6/30/2014

Estimates by Heller House, on an economic, not fully consolidated basisSource: Company filings


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Look-through earnings methodology c

Then, we add the look-through net earnings of all public subsid

Exito, Big C and Mercialys, using Casinos economic ownership converted to euros at the current FX rate

On this basis, Casino is trading at 18x 2014s estimated look-thr

However, if we assume growth in sales in the listed subsidiariesrecent trends, and stable margins, Casino would earn 8.2 per sthrough basis in 2017

At 90.8 currently, Casino is trading at only ~11x 2017 estimated

At 18x in 2017, Casino would trade at 148, or 63% upside

Economic ownership includes TRS (total return swaps); FX at 9/1/2014

Sales growth of 10% at GPA, 8% at Exito, 7% at Big C, 3% at MercialysAssumes stable margins, but improvement at GPA based on 2013 investor da


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Still not accounting for full value

Our estimate of value in 2017 implies a market cap for Casino of

Yet the sum of the portion of the public subsidiaries owned by C16.6 billion

Still attributing little value to the French business

Any parent company deleveraging and improvement in France

Bottom line: Casinos ownership of fast-growing emerging mshould drive the stock over the next several years, regardless

Economic ownership includes TRS (total return swaps); FX at 9/1/2014

Sales growth of 8% at GPA,6% at Exito, 7% at Big C, 2% at MercialysAssumes stable margins, but improvement at GPA based on 2013 investor da


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Casino has ahidden asset

Spotted at the Muse du Louvre


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Cdiscounts logistics advantage

In Europe, the Click-and-

Collect model is moreprevalent than in the US

In the first half of 2014, 56% oforders in France weredelivered through Click-and-Collect, accounting for 59% of

revenues Cdiscount has a network of

over 17,500 pick-up locations(see right), larger than anycompetitor

Source: Company filings

Cdiscount: specialty brands &


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Cdiscount: specialty brands &international expansion

In addition to Cdiscounts main sites, it also operates specialty s

Comptoir Sant (health and beauty products) and MonCornerDhome dcor)

In 2014, two new concepts will launch MonCornerBaby premium one-stop site for maternity products with sub MonCornerBrico do-it-yourself home renovation products and tutorials

In first half of 2014, Cdiscount launched operations in ColombiaThailand and Vietnam

Launched operations in Ivory Coast in partnership with Bollor Logistics, and will expand into two additional African markets bthe year



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Brazil: Nova Pontocom

Nova Pontocom is the e-commerce

platform of Grupo Po de Acar Number two player in Brazil, GMV CAGR

of 49% over past 5 years

Sales of 1.47 bn last year, and up 48% YoY inthe first half of 2014 compared with 26% for theBrazilian ecommerce sector in general*

Gaining market share at expense of competitors: from 8% in 2008 to

Experienced management team: Germn Quiroga, founder and CEOPontocom, was a founder of americanas.com, part of B2W (#1 player

Pilot Click-and-Collect program with 2,000 store locations

*At constant currency; sales in Brazil are booked in ReaisSource: Company filings


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Cdiscount + Nova Pontocom = Cnova

Casino is planning an

IPO of Cnova on theNYSE in order tohighlight the value ofthis hidden asset

Registration statementhas been filed with theSEC

Total sales of 2.9 billionin 2013 and growth of29% to June 30, 2014


Internet and smartphone penetration a


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p ptailwinds for Cnova

Sources: http://data.worldbank.org/indicator/IT.NET.USER.P2http://en.wikipedia.org/wiki/List_of_countries_by_smartphone_penetration

http://www.atelier.net/trends/articles/cote-ivoire-government-hoping-turn-country-regional-ict-hub_424740Company filings

Low penetration of internet users and smartphonestranslates into faster growth

African countries can leapfrog other countries withvery fast smartphone adoption


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Accretion from Cnova IPO

Cnova did 2.9 billion in sales last year and may do 3.4 billion t

ignoring new sales from Colombia, Ecuador, Thailand, Vietnam We estimate Casinos economic ownership of Cnova at 64.17% (

balance owned by GPA, Via Varejo, Exito and some members ofat Via Varejo)

Public comps trade at very diverse multiples; lowest multiple of(Nova Pontocoms direct competitor in Brazil) at 1.5x sales

Next is Amazon at 1.9x sales, Ocado and AO.com at 2.3x sales a2.6x sales

Well use the lowest multiple for Cnova, 1.5x sales

Source: Bloomberg, company filings, Heller House estimates; includes TRby Casino on GPA shares


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Accretion from Cnova IPO cont.

With 3.4 billion of sales, at 1.5x sales, Cnova could be worth 5

Casinos direct and indirect stakes would be worth 3.3 billion, oshare; assuming modest growth, could easily be worth 4.3 bill32 per share, assuming Casino IPOs 10% of its holdings

Source: Bloomberg, company filings, Heller House estimates; includes TRby Casino on GPA shares. Estimates Casinos 2017 ownership of Cnova at 5


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But there is one more thing


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But there is one more thing


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Our idea today (really):

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Rallye: leveraged exposure to Casino

Rallye has 2.7 billion of net bond and bank debt

It also owns 224 million in financial assets, 165 million of whicprocess of disposing*

Prior to 2008, Rallye received a lot of cash flow from its financiaaddition to Casinos dividends

Only used cheap bank debt; in 2009, was forced to pay a high paccess bond markets due to instability in the banking sector

Rallye has been actively deleveraging by conducting tender offrefinancing its high cost debt (2009 bonds at ~8%) with lower c(2014 7-year bond at 4%)

*Mostly real estate and private equity investmentsSource: Bloomberg, company filings, Heller House estimates

Yield-to-maturity of Rallyes 5-year


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y y ybond is at all-time lows

Source: RALFP 4 03/11/19Bloomberg as of 9/2/2014

Extremely low Eurozone interest rates give Rallye an extraordin

opportunity to refinance higher coupon bonds into lower couposimilar maturity issues, as it did earlier this year


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Rallyes upside based on Casinos gro

As Rallye deleverages and begins building NAV, its discount sho

narrow, and will eventually trade at NAV

On a look-through earnings basis, Rallye trades at 7.1x 2013 earand 3.9x our estimate of 2017 earnings for Casino

Rallyes current NAV math: Casinos market cap: 10.3 billion, 5 billion owned by Rallye

Plus other financial assets of 224 million, less net debt of 2.7 billion Equals NAV of 2.5 billion, or 51.75 per Rallye share

Currently trades at 36.40

Source: Company filings, Heller House estimates

Rallyes NAV per share


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and potential upside

Source: Company filings, Heller House estimates. R

look-through EPS in 2017 is estimated at ~9.3 per

Rallyescurrentstock price

RallyescurrentNAV

NAV fairvaluing theFrenchbusiness in2014

NAV fairvaluing theFrenchbusiness in2014 + Cnova

NAVlook-earnCasinCnov


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Why this opportunity exists

Extremely complex corporate structure, with eight publicly trad

entities in four different currencies, confusing accounting (IFRSconsolidation), no holding company financials, intricate debt iss

Hard to understand the full picture, including the opportunitiesgrowth in emerging markets and the quality of management; mstuck on France, when in reality France matters little

Low profile CEO and foreign company have received very little press

Limited free float: only 800 million of Rallye publicly traded mtoo small for most institutions*

*The balance, or 55.4%, is owned by Foncire Euris, the next holding comp

the chain. Source: Company filings, Heller House estimates.


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Summary

An investor in Casinos equity is getting a set of fast-growing em

market assets and an attractive French business with substantiaestate holdings, plus a global, fast-growing ecommerce busine

Hard catalysts in the form of Cnovas IPO and future real estate

Very cheap, leveraged way to invest in Casino, through Rallye

Substantial value creation opportunity for Casino and Rallye as

emerging market subsidiaries grow, and Casino and Rallye dele All assets, with the exception of Mercialys, are controlled by Jea

Charles Naouri, who is very hands-on, has proven to be a great operator and financial engineer, and should continue to generafor shareholders


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2014 rallye casino

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