Fnac Darty : The Carrefour option is also a catalyst for the credit

>Wednesday 05 July 2017 - Shareholders - Artemis - 24.7% - Knight Vinke - 11.6% - Vivendi - 11.3% - DNCA - 9.4% - Prudential - 4.9% - Free float - 38.0% - - Secondary market spreads - Issuer - Rating - Maturity - YTW - Fnac Darty - Ba2/BB - 2023 - 1.8% - Faurecia - Ba3 - 2023 - 1.7% - Rexel - Ba3/BB- - 2023 - 1.8% - Ardagh - Ba3/BB- - 2023 - 1.8% - - Indicative spreads - - / - Source: Bloomberg - Equity data - Recommendation: Buy - Target: € 75 - Equity analyst: Nicolas Kieffer - [email protected] - 33 (0)1 44 51 87 95 - ESG analyst: - - Corporate governance: -- - / - / - Alexandre Bompard announced he would step down as Fnac Darty’s CEO to replace Georges Plassat at the helm of Carrefour. - In its report dated 02 June 2017 and entitled "The key to the Bompard option: a Carrefour & Fnac-Darty merger scenario", our equity research team estimated that the key to Mr Bompard's arrival at Carrefour would be the approval by the Carrefour board of directors of a link-up of Carrefour with the Fnac/Darty group. This assumption is appealing at the managerial and economic level for the two groups, the link-up of which would see them overtake the giant Amazon in France. An attractive upside potential if the scenario materialises - In this report, we calculated that such a tie-up should be compatible with Carrefour's Baa1/BBB+ rating regardless of the funding chosen by the group.The 2023 Fnac Darty bond, which already outperformed the market since its issuance in September 2016 until early June (-103bp vs. -59bp for the JPM BB index), benefited from new impetus from 2 June thanks to our equity analyst team report on the potential merger with Carrefour (price before the publication gained +1.35 pts to 105.75%, before returning to 104.8% today, still slightly above the price before the report’s publication (104.4%). In the event of a link-up with Carrefour, Fnac Darty would have the choice to:1/ keep its outstanding bond. In this case, it would naturally benefit from Carrefour’s credit quality and the rating differential between the two companies (Baa1/BBB+ for Carrefour vs. Ba2/BB for Fnac Darty). The 2019 Carrefour bond deals on the basis of an asw+12bp spread (vs. asw+191bp for the 2023 Fnac Darty bond on the 2019 call), which would now correspond to a price of 108.8% for Fnac Darty, i.e. 4 pts of upside potential.2/ prepay its bond due to its 3.25% coupon, short of Carrefour’s credit quality. Before the first call date (30/09/2019), Fnac Darty has the option to prepay its bonds by paying a make-whole premium, i.e. Bund spread+50bp, which would correspond today to a price of 108.8%, an upside potential of about 4 pts.In the absence of a merger, the downside seems limited to us - In the absence of a link-up, if the 2023 Fnac Darty bond was to return to its asw spread in early June, the downside risk would now be limited to less than one point (104.2% vs. 105.1%). Moreover, the current 1.8% YTC is in line with that of peers, or even slightly higher relative to the rating, especially compared with the 2023 Rexel note, call 2019 (Ba3/BB-: 1.8% YTC), 2023 Faurecia, call 2019 (Ba3: 1.7% YTC), 2023 Ardagh call 2019 (Ba3/BB: 1.8%). The decline may ultimately be limited in the absence of any tie-up with Carrefour, especially as, on a stand-alone basis, we expect a gradual improvement in Fnac Darty’s credit quality over the coming years. The group is set to benefit from bright prospects for white products and synergies linked to the merger which will support operating margin and allow a deleveraging of around 0.2x-0.4x annually in our view.We are initiating coverage with a Positive credit opinion and Buy recommendation.