Understand the downfall of the head of the company that runs GPA – 07/24/2023 – Market

Five years ago, Jean-Charles Naouri, 74, was given the opportunity to sell his French supermarket empire Casino before it collapsed under a mountain of debt.

In Brazil, the group owns 40.9% of the share capital of GPA, owner of the Pão de Açúcar stores and the second largest food retailer in Brazil (just behind Carrefour). The French group fought a battle with Brazilian businessman Abilio Diniz for the acquisition of the company.

A month ago, it announced that it intends to sell its stake in an effort to reduce its debt and ensure economic sustainability.

Muddy Waters Research, a US short seller, had already sounded the alarm about the debt-ridden group’s opaque structures when, in September 2018, Alexandre Bompard, chief executive of Carrefour, Casino’s biggest rival, suggested a merger. Bompard was prepared to accept that Naouri would become the largest shareholder in the merged group, according to people with knowledge of the meeting.

Naouri’s reaction was fierce. Casino went public about the approach and said it turned it down. Carrefour was forced to clarify that no formal offer had been made. The move ended any chance of a deal, the people said.

The episode was typical of Naouri, according to people who worked with him and described him as a brilliant mind, blinded by a growing paranoia.

“After the Muddy Waters attack, he lost all direction and meaning,” said one person who worked with Naouri. “He is extremely talented and paranoid. […] He closed the door almost immediately on the Carrefour deal. He thought he could save the company all by himself.”

Since then, Casino’s market share has dwindled and its share price has fallen, from around €33 (£173.58) to €3 (£15.78) each, as the company loses money to sustain its operations. Now, Naouri’s 51% stake is set to be phased out as part of a bailout led by Czech billionaire Daniel Kretinsky.

The deal is expected to be finalized later this month, closing a chapter in a decades-long saga that has stunned France’s business establishment, which first rallied to support one of its own.

“The real story is how the business world of Paris allowed it for so long,” said the person who worked with him. “There was extreme respect for him in business circles in Paris, so the banks didn’t do his job. If he hadn’t been so protected and held in awe, it never would have dragged on for so long.”

Naouri “had the right vision,” said Clement Genelot, an analyst at Bryan Garnier. “He was one of the first to believe in the rise of online retailing […] and see that the large hypermarket formats were doomed. Although, […] he was already limited in terms of investment capacity.”

A Casino spokesman said: “Anyone who knows Jean-Charles Naouri can attest that he remains calm under all circumstances, despite the fact that the 2015 attack (by Muddy Waters) was violent.”

Born in Algeria and raised by a single mother, Naouri managed to get into France’s elite universities thanks to his talent for mathematics. There, he rubbed shoulders with future leaders and captains of industry. He joined the government of Socialist President François Mitterrand, when he masterminded reforms aimed at liberalizing France’s financial markets. His intellectual abilities impressed many.

“He’s the smartest man I’ve ever met, really in another league,” said Louis Schweitzer, the former chairman of Renault, who knew Naouri in government.

After a stint at Rothschild, he took over troubled retailer Rallye in 1991, then rivals Casino and Leader Price a few years later. A debt-fueled expansion in Asia and Latin America followed.

Naouri used the “Breton pulley”, a French financial technique adopted by other emerging entrepreneurs, including Vincent Bolloré, which allowed him to control the Casino with a minimal amount of capital through a series of holding companies.

But the low-margin retail sector meant that he was never able to reduce the group’s debt pile, preferring to reserve firepower for acquisitions, according to Genelot.

It took an American to break the French silence on the failings of Naouri’s empire. Muddy Waters, owned by short seller Carson Block, took aim at Casino in December 2015, when its hedge fund first disclosed its short position.

At first, Naouri appeared to ignore the attack, selling the Asian operation and raising debts with banks and bond investors. But leverage in his own group would eventually prove his downfall.

“French banks were much more willing to ‘lay and fake’ than we anticipated,” Block told the Financial Times this week.

Many on Naouri’s team see Block’s attack as the cause of Casino’s financial problems, not a consequence. Without Muddy Waters, Casino “would not be in this financial situation,” said a person with direct knowledge of Naouri’s thinking. “Most people agree that assets are good […] There was a choking phenomenon, after the attacks were discovered, which made it difficult to refinance.”

Blaming Muddy Waters for the Casino’s problems is “illusory,” Block said.

In 2019, the four holdings above Casino, which had more than €3.7 billion in debt and derivative liabilities, were forced to file pre-insolvency proceedings in France, known as “safeguarding”.

Casino’s critics complained of being harassed or surveilled: Block revealed in 2017 that a French corporate intelligence agent posed as a reporter for the Wall Street Journal in an attempt to uncover more information about his strategy. Kepler Cheuvreux told its clients in 2020 that Fabienne Caron, an analyst who had written critical reports about Casino, had received “anonymous intimidation attempts”.

Caron, who has since left Kepler, declined to comment. Block said he believes Naouri was behind these efforts. Naouri and Casino have denied the allegations.

For Block, the root of the entrepreneur’s downfall was arrogance, which “manifested itself in an inability to manage risk. He embraced financial risk as if he thought he was immune to it,” he said.

Current restructuring talks have taken a toll on the businessman, whose fortune, estimated at $1.2 billion (R$5.8 billion) by Forbes in 2015, has evaporated. He “is busy seven days a week doing everything to get the Casino back to safety,” said the person next to him. “It’s really about bringing Casino into the right harbor.” After it’s all over, he can “take a gap year, teach, or start another business.”

“He was affected by all of this,” said another person close to the talks. “It’s his life’s work.”

Translated by Luiz Roberto M. Gonçalves