Somebody Finally Stood Up to the Hedge Fund Investors

Implications: Is "Market Woes" the real reason for this rather unusual about face ? What really went on in Carrefour's board room to convince the impatient hedge funds to back off from their insistence on increasing the debt load? It seems to me that it was being done just to satisfy some greedy short term investors.   A wider understanding of what really happens when a company decides to increase their debt load via the sale leaseback route, could benefit the typical GLG reader.

Analysis: As the article points out, there were several other European retailers that were under pressure to follow Carrefour's lead and set up a public REIT to "increase shareholder's value," (defined as borrowing money for the sole purpose of making a onetime payout to current investors). 

Now that Carrefour has done the math and come to their senses, the other retailers are likely to also rethink this very dangerous practice. My reasoning is as follows:

First of all it should be noted that the sale-leaseback arrangement is a well understood process that is widely employed for legitimate purposes in a wide variety of industries. Most successful CFOs view it as a viable alternative means of raising capital for NECESSARY company expenditures  in the same way they view selling bonds, issuing new stock, or simply going to the bank and availing themselves of their line of credit. In many instances and under a variety of circumstances selling their owned assets and leasing them back could be a less expensive (or if the company has troubles borrowing money at a normal rate of interest, it may be the only) means of borrowing needed funds.

However, the past few years have seen a new type of reasoning enter the decision making process.  Many large investors have gained enough influence in the board rooms of heretofore conservatively managed companies, to force these companies to load up with debt for the sole purpose of making unwarranted one time "pay outs" to their investors. 

In my opinion this is a dangerous and deceitful practice. It is harmful to the company in that the debt is used to simply allow greedy short term investors to enrich themselves at the expense of the long term investor. It does not help the company compete in the marketplace in any way. Every CFO I have ever talked to about this practice will readily admit that loading up the company with debt when there is no prudent business reason to do so, is simply not a good practice.

However I have also talked to several CFOs who have done this and who had admitted they did so very reluctantly simply as a "payoff" to satisfy certain powerful owners or investors.

When this technique is used in a family business, it is a sensible way for the owners to "withdraw their savings" or to enrich future generations of family members through ownership of the REIT or the rental income on a few of the owned assets.

However when the same thing is done in a public company, I consider it an unwarranted raid on the company assets.  I also believe it is a reliable indicator of a company whose Board of Directors is clearly under the control of investors with very short term goals and very little, if any, regard for the long term viability of the company.