Carrefour's blues: global retailers squeezed by private equity fund activism
While retail concentration gives global supermarkets the power to set prices and squeeze food manufacturers and farmers, the retailers themselves are being squeezed from another direction - private equity funds.
The pattern is similar to private equity buyouts and strategic investments in the hospitality sector, where real estate assets are the prime target. The real estate is used as collateral to finance the leveraged buyout (through mortgaging and re-mortgaging property) then after the takeover it’s separated from the hotel or retail business. The real estate side of the business then charges rent to the hotel or retail business, generating a steady cash flow that - a we’ve seeen so many times with private equity funds - means cash outflow. In the case of the UK retail chain Debenhams, this left the company massively indebted.
As we have also seen (particularly in the case of Japan) even in the absence of a leveraged buyout, private equity funds can exert a powerful influence on companies, imposing short-term financial targets and excessive rates of return. By taking a minority stake in a company and behaving as activist investors (“Re-investment is theft! Not enough debt!”) private equity funds compel companies to divert resources away from investment and into shareholder dividends, often at rates that are unsustainable in the long-term. (In the long-term the private equity funds will be long gone anyway.)
Now the world’s second largest retailer Carrefour is being squeezed by a similar kind of private equity fund activism.
Last year a private equity fund called Blue Capital became Carrefour’s biggest shareholder. Formed by French billionaire Bernard Arnault’s Groupe Arnault and the US-based Colony Capital, Blue Capital currently holds a 13.5 percent stake in Carrefour. The fund now has two seats on the board of the company (and is pushing for a third) and 12.6 percent of the voting rights. [See "Blue Capital ups Carrefour stake further", just-food.com, 21 July 2008.]
The impact is already clear. Carrefour’s investment and growth strategy has been dramatically revised, with the promise of 4.5 billion Euros in returns to investors generated primarily through asset sales.
By selling off real estate assets to satisfy the short-term appetite of Blue Capital, Carrefour supermarkets and hypermarkets throughout Europe and around the world would in the long-run pay higher rents, raising operating costs. [See "Shopping around - is Carrefour an example of activist investing gone wrong?", The Economist, 18 October 2008.]
The Economist quotes a spokesperson for Blue Capital denying that the private equity fund has an direct involvement in Carrefour’s business: “We never intervene in pricing at Carrefour as we consider that it is not the role of the board.”
But the reality is that the short-termism and high returns that underpin the logic of private equity funds has a direct and lasting impact on how Carrefour does business. The impact will also be felt beyond Carrefour. To absorb the costs of higher rent the retailer is unlikely to raise shelf prices. Instead it will be food manufacturers and suppliers - and in turn food workers and farmers - who will be squeezed even more.