(The following statement was released by the rating agency)
Oct 12 - =============================================================================== Summary analysis -- Groupe Auchan S.A. ---------------------------- 12-Oct-2012 =============================================================================== CREDIT RATING: A/Stable/A-1 Country: France Primary SIC: Miscellaneous retail stores, nec =============================================================================== Credit Rating History: Local currency Foreign currency 30-Jun-2003 A/A-1 A/A-1 05-Nov-2002 --/A-1 --/A-1 =============================================================================== Rationale
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The ratings on French food retailer Groupe Auchan S.A. reflect Standard &Poor's Ratings Services' view of the group's strong business risk profile,underpinned by its well-established positions in regulated European markets,its expertise in the hypermarket format, and its modest financial riskprofile.
Auchan's key business strengths include its No. 4 domestic market position,with a market share of about 12%. The company benefits from wide recognitionof the Auchan banner in its home market, thanks to its almost nationwidecoverage. Our assessment of the business risk profile also factors in thecompany's good geographic diversity, with well-entrenched positions in Asiaand Eastern Europe. On the downside, the group relies heavily on thehypermarket format, which generates about two-thirds of its EBITDA, and ismaterially exposed to Southern European markets.
Our view of Auchan's financial risk profile as modest relies on financialmetrics that we consider adequate for the current ratings, specifically fundsfrom operations (FFO) to debt of 41% and debt to EBITDA of 1.9x at year-end2011. We also take into account the group's recent acquisition of 49% of thereal estate company Gallerie Commerciali Italia SpA (GCI). We view the group'sfinancial policy as moderate, and consider that management demonstrateswillingness to maintain adequate financial flexibility.
S&P base-case operating scenario
We anticipate that Auchan's current strategy will help it to maintain itsmarket positions and limit eroding profitability. Considering the currenthighly competitive environment, Auchan's focus on volume generation issensible, in our opinion. Our view that the group will likely maintain itsmarket share in its home market, thanks to its positive price image and to itscontinued rollout of the Drive concept (customers order online and drive tothe outlet to collect purchased items), underpins our assessment of thebusiness risk profile.
In our base-case scenario, we foresee mid-single-digit growth in revenues overthe next 12 months, on the back of increasing trading space and growinginternational operations. We believe that Auchan's adjusted EBITDA margin willnarrow by 10 basis points (bps) in 2012, after losing 50 bp in 2011, becausecompetition remains stiff and the growing number of government austeritymeasures rolled out in Western Europe is constraining consumers' disposableincome.
In our opinion, Auchan's real estate ownership and development activities atits subsidiary, Immochan (not rated), are a diversifying and strategicallysupportive factor for the group. Immochan contributed enhanced consolidatedprofitability in 2011, reporting an EBIT margin of 48% for the year.
S&P base-case cash flow and capital-structure scenario
Auchan's disciplined financial policy, supported by the financial flexibilityit derives from its real estate ownership, should enable the group to sustaina financial profile commensurate with the current ratings. Despite ourforecast of additional erosion in profitability this year, we believe thatAuchan will maintain robust credit metrics in 2012, namely adjusted FFO todebt in the 35%-40% area and debt to EBITDA at about 2.0x. Although theseratios may slightly deteriorate subsequently, we believe they will likelyremain at satisfactory levels for the current ratings.
Our base-case scenario now factors in a moderate increase in capitalexpenditures (capex), which we understand will rise to roughly 4% of revenueson a gross basis over the next two years, owing to Auchan's expansion inemerging markets. However, we believe that the company is ready to curtailthis cash outflow in case of deteriorating performances or if it is unable todivest assets, in line with its track record of prudent financial policy. Wealso anticipate that shareholder remuneration will remain limited, in linewith previous years.
The short-term rating on Groupe Auchan S.A. and Auchan Coordination ServicesS.A. is 'A-1'. We view Auchan's liquidity as "adequate" under our criteria andcalculate that liquidity sources will likely exceed liquidity needs by morethan 1.2x over the next 12 months.
As of June 30, 2012, we estimate liquidity sources of around EUR5.4 billion.These include:
-- EUR1.6 billion of surplus cash, excluding EUR300 million we consider to betied to operations;
-- EUR2.0 billion of undrawn credit lines, of which EUR0.8 billion mature in2014 and EUR1 billion in 2015; and
-- EUR1.8 billion of reported FFO forecast over the next 12 months.
We estimate Auchan's liquidity needs over the next 12 months to be about EUR4.2billion, comprising:
-- EUR2.3 billion of short-term debt, excluding the debt related to bankingactivities;
-- EUR1.8 billion of capex; and -- EUR0.2 billion of dividends.
Some credit lines bear a financial covenant (debt to EBITDA of maximum 3.5x),but Auchan has significant headroom (the ratio was 0.9x in December 2011). Weconsider Auchan's liquidity to be sufficient to cover its reportedconsolidated short-term debt of EUR3.7 billion on June 30, 2012, including thatat captive finance subsidiary Banque Accord (A/Stable/A-1).
The stable outlook reflects our view that Auchan will slightly increase itsEBITDA generation and at least stabilize its market shares in 2012. We alsobelieve that Auchan will maintain a balanced financial policy, which impliesthat it will adjust its capex program to its operating environment and theactual proceeds of asset divestments. We view an FFO-to-debt ratio of 30%-35%and a debt-to-EBITDA ratio of 2.0x-2.5x as commensurate with the currentratings.
We could lower the ratings on Auchan if, despite increasing capex, EBITDAgrowth fails to materialize, for instance because of an erosion in marketshare or substantial pricing pressure. We would also consider a downgrade ifthe group is unable to maintain credit ratios in line with our guidelines forthe current ratings. Such a possibility would arise in the event ofhigher-than-anticipated capex, a large debt-financed acquisition, orshareholder payouts exceeding our current expectations.
Rating upside would hinge on a recovery in Western European markets, Auchan'senhanced geographic diversity, and a stabilization of credit metrics at 2011levels. Such an outcome appears remote to us for the moment.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,2012
-- Methodology And Assumptions: Liquidity Descriptors For GlobalCorporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The RetailIndustry, Sept. 18, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008