Société Fermière du Casino Municipal de Cannes – Euronext Paris: FCMC

The Société Fermière du Casino Municipal de Cannes (or henceforth, SFdCM) is quite possibly the world’s cheapest luxury company. The group owns three world-class hotels, two on the French Riviera at Cannes and the other in St. Bart’s. SFdCM also operates two Cannes casinos and several restaurants.

It is difficult to overstate the quality and reputation of these properties, particularly the Hôtel Majestic.

Hôtel Barrière Le Majestic

Built in 1926, the Majestic is a five-star Art Deco masterpiece. The hotel is popular with film festival attendees. The hotel offers a private beach, several restaurants and nearly every imaginable amenity. Presently, the Majestic has 257 rooms and 92 suites.

The view from the Mediterranean.

Hôtel Barrière Le Gray d’Albion

Le Gray d’Albion is a four-star property located next door to the Majestic. This 200 room property employs more modern design, but nearly the same luxuries.

Hôtel Barrière Le Carl Gustaf Saint-Barth

Finally, SFdCM owns a hotel in a favorite Caribbean destination for well-heeled travelers, St. Barts. Le Carl Gustaf is a boutique with 23 rooms and suites. The hotel was built in 1991 and acquired by SFdCM a few years back. After a top-to-bottom renovation and a hurricane-related delay, the hotel is now open for business. The property’s chef formerly ran an establishment with 3 Michelin stars. Fancy! The company put out a glossy press kit in preparation for Le Carl Gustaf’s grand re-opening.

The Casino Barrière Croisette and the Casino Barrière Les Princes

These casinos offer 340 slot machines and 38 gaming tables, plus dining and entertainment. The properties are just half a mile apart and within easy walking distance of the Majestic and Le Gray d’Albion. SFdCM operates the casinos under long-term concessions from Cannes.

Valuation

In 2018, SFdCM brought in revenue of €145.9 million and earned operating profit of €25.9 million. After taxes and minority interests, profit was €21.1. As I type, the company has a market capitalization of €296.1 million. The company has essentially zero debt and net cash of €35.8 million for an enterprise value of €260.3 million. That works out to a very undemanding multiple of 10.1x operating income and a P/E of 12.3, net of excess cash.

And yet, I believe these financial ratios do a poor job of capturing the value of SFdCM’s unique assets. I think a lot of value investors get caught up in the dollars (or euros) and cents and fail to recognize the enormous public relations benefits and cachet that owning a trophy asset like an historic, high-end hotel brings. For the most part, nobody buys these trophy assets hoping for a financial bonanza. Yes, they hope to at least recoup their investment over time, but the most significant benefits to ownership do not show up on the profit-and-loss report. The signaling involved is far more important than the financial details. China’s Anbang Insurance did not buy the Waldorf-Astoria for a whopping $1.4 million per key because it was the best deal around, they did it to assert their claim to membership in the world’s largest and most prestigious financial companies. A consortium of Japanese corporations were playing the same angle when they bought the Pebble Beach Company in 1990. (Interestingly, these transactions marked a peak for the acquirers with each falling upon difficulties not long after.) LVMH’s 2018 buyout of Belmond also springs to mind. In this case, the world’s premiere luxury brand burnished its existing suite of products and services by adding Belmond’s extraordinary hotels and travel offerings.

I think a superior means of valuing SFdCM is by looking at each asset. The Hôtel Majestic is the crown jewel. The Majestic by itself could fetch €1 million per key. Jaw-dropping? Maybe, but we are talking about an architectural icon in one of the world’s most sought-after locations. That would value the hotel at €349 million. Le Gray d’Albion is smaller and less prestigious, but it benefits strongly from its proximity and association with the Majestic, not to mention its access to the Majestic’s private beach. Valuing Le Gray d’Albion at €600,000 per key for a total €120 million is not out of the question. That yields a value of €469 million for the Cannes properties.

It’s more difficult to place a value on Le Carl Gustaf. The hotel opened only recently and doesn’t have an operating history or a decades-long reputation for excellence. On the other hand, it does enjoy an incredible location and no expense was spared in its renovation or staffing. Being conservative we can value the hotel at the cost of its renovation, €19 million. That yields a value of €488 million for SFdCM’s trio of hotels.

The company’s casinos are difficult to value apart from the associated Cannes hotels. Neither casino produces a consistent profit, but they do have significant strategic value as a conduit funneling guests to the Majestic and Le Gray d’Albion. Gambling appears to be in long-term decline in the region as more gamblers opt for internet competitors. For these reasons, I don’t think the casinos have much independent value and I won’t provide them with such in my estimates.

Including net cash, I estimate SFdCM’s value to be at least €523 million, or €2,990 per share. Just as a reality check, that works out to €853,000 per key. Again, high! But SFdCM’s assets are singularly attractive. And it’s not as if this valuation is indefensible on an earnings basis, either. 23x trailing earnings is a very fair value for the company’s trailing income stream, especially because Le Carl Gustaf will begin contributing to results in 2020. Let’s hope for fine weather in the Caribbean!

So, Why Is It Cheap?

If the company’s assets are really so irreplaceable and prestigious, then why do shares trade at a 43% discount to my estimate of fair value? The answer, like many of the companies profiled on this blog, is illiquidity and obscurity. Despite its €296.1 million market capitalization, the value of free-floating shares is less than €20 million. The Desseigne-Barrière family owns 60% of shares, Fimalac Développement holds another 10%, and a Qatari investor, Casinvest, holds 23%. The remaining shares trade sporadically on the Euronext. I doubt the vast majority of investors even realize the company is public. SFdCM is very much a family-controlled enterprise. Major shareholder affiliate Groupe Lucien Barrière essentially acts as external manager for SFdCM, handling operations and advertising the Majestic, Le Carl Gustaf, and Le Gray d’Albion alongside the many other fine Barrière hotels in France and elsewhere. As always, investors must maintain skepticism when it comes to family-controlled companies. Many do not respect the rights of minority investors or deal fairly with the company. In SFdCM’s case, these risks are reduced by the presence of extremely deep-pocketed Fimalac Développement and Casinvest.

I don’t think investors in SFdCM should expect its ownership structure to change dramatically in the short term. I do think it’s highly likely that the majority owners eventually make an offer to minority holders to take the company private. Why deal with the hassle of a public listing when there is minimal trading activity and a depressed valuation? The Desseigne-Barrières, Fimalac, and Casinvest certainly don’t care about the price at which a few dozen shares changed hands, nor does the company need access to public equity markets in order to raise capital. If an offer does materialize, shareholders should not expect to receive full value for their shares. But at a discount of this magnitude, I think shareholders will do rather well regardless of whether or not an offer materializes.

Alluvial Capital Management, LLC holds shares of Société Fermière du Casino Municipal de Cannes for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

28 thoughts on “Société Fermière du Casino Municipal de Cannes – Euronext Paris: FCMC”

  1. Were there hotel transaction comps that helped you triangulate the $/key estimates beyond the Anbang deal? If so, what were they?

    How much are they paying for management? Anytime, I hear “externally managed” in association with real estate/properties, it catches my attention as a yellow flag.

    1. Yes. I used a variety of recent “prestige asset” transactions to perform a rough calculation. “Rough” being the key word. My argument is at this valuation, you don’t need an heroic valuation to do very well. Even a per-key valuation of Eur 600,000 would yield a healthy premium, and Eur 600,000 is below where some very good hotels in strong markets have been priced, not rare assets in premiere locations.

  2. Intriguing idea. However, how to you get the financials? I read and understand some French and was unable to download the financial from the company’s website. Meanwhile, would it not make not sense for the group to wait for the next recession to buy out the minority holders for less? Regarding your idea that this stock is a good holding regardless, could it be that there are generational issues in the family of the largest holders which could result in the whole firm being sold.

    1. That could absolutely happen. Always a risk with controlled entities. Although, they had ample opportunity to force out minorities in the last recession and they did not.

    2. I used translation tools to produce an English language version of the annual report. I can e-mail it to you if you like.

  3. Great write up thank You.

    I have noticed this item on their history page:

    – 2005: The Groupe Lucien Barrière (GLB SAS), which the SFCMC is independent from, is created. A service agreement between GLB SAS and SFCMC is drawn up. Slot machines installed at Casino Barrière Les Princes.

    Will have to dig down, why they have GLB independent on SFCMC.

    1. You absolutely cannot. You have to be comfortable with management’s abilities and ethics. Very common situation with family-controlled companies. Not an investment for activists.

      1. I hear you – but they are not even paying a decent dividend in that case.

        I used to finance hotel acquisitions (largest one was hilton taken over by blackstone): biggest worry with historic trophy property is the level of capex, called FF&E when dealing with hotels.

        A lot of them under-spend. Some see it as a variable cost (function of revenue) instead of a fixed cost, and slow down fixing the property when revenue per available room (or occupancy levels) drop. We had to force them to provision for this in an escrow account.

        Do you have any info on that front? How much have they been spending on FF&E over the last 5 years for example?

        1. I am not an expert on hotel capex policies, but I don’t think there is anything to worry about with respect to underinvestment in these properties. The ownership group here is extremely long-term oriented and understands the need to maintain the highest standards. They don’t answer to stock market analysts or really any shareholders besides themselves. The public entity is so thinly-traded that this is effectively a private company that the public can invest in.

          That said, here’s a look at historical capex spend as a percentage of revenue and on a per room basis:

          2018: 8.9% of revenue, Eur 23,679 per key.
          2017: 8.7% of revenue, Eur 22,222 per key.
          2016: 6.3% of revenue, Eur 16,393 per key.
          2015: 5.8% of revenue, Eur 15,146 per key.
          2014: 5.0% of revenue, Eur 11,861 per key.

          The company’s investment in its hotels appears adequate to me, and has actually increased a lot in recent years.

  4. For transparency, I own shares so have an interest in it going up. I have no inside info so I could be very wrong… My thesis is that it will go between 3000 and 3500 within 2 years.
    1st, the 10y shareholders agreement expires in June 2021. Looking at the age of D. Desseigne and M Ladreit de Lacharriere, there will have to be some succession management…
    2nd, fimalac bought the shares at 2000 apiece in 2011. Needless to say that the situation is way better now and the cash has built. They are usually looking for a nice profit
    3rd, they resumed paying a nice dividend last year so that the holding will have more cash for the tender offer
    4th, fimalac recently withdrew from the Paris stock exchange. The SOP valuation of the expert is above the current share price, providing a floor
    5th, most hotel chain trade between 20 and 25 times earnings and do not own the property (asset light). Doing a comparable valuation would lead to 3000/3500 a shares

    Nothing is sure but the odds are good, that is all we can do…

  5. Are there any risk of the majority sh’s squeezing out the 6% at an unfair price? Are you into French shareholder policies? I experienced a bad squeeze out in a small german company once where they actually forced us out at a much lower price than market price due to ridiculous rules

    1. That’s probably the primary risk here, that shareholders do not receive fair value in a going-private transaction. It’s also why the size of the discount to intrinsic value matters. I would not be interested at a 15-20% discount, but this is much larger.

      1. Fascinating post, thank you for sharing. A few observations/questions if I may;
        1. Why is this a listed company? A 7% free float and family controlled…there is no need for this to be a listed company, and therefore a discount to fair value reflects the risk to minorities from being squeezed out (though the quantum of this risk can be debated).
        2. Given that 2020 will be a wash in terms of revenues and therefore likely result in net losses, how attractive does the share price look vs it’s book value, and in turn how does this metric look vs luxury peers?

        Thank you again!

    2. I am French.
      French policies allows that you can be squeezed out. In that case, there is an “independent” person who estimates the value of the society and guarantees that the offered price is fair. But this independent person is paid by the society…

      1. Do you have comps of discount to NAV in other French minority squeeze-outs?

        Has a third party’s opinion ever been challenged in French courts previously?

        1. Hello Tony,

          Discount to NAV. To date, the AMF (the french equivalent of SEC) has authorised public offering at prices lower than the NAV, but never in the event of forced squeeze out. However there is no official rule about it, the AMF do not exclude that possibility.

          Courts. Minority shareholders who challenged the offer price in AMF “court” have already won, yes (e.g. for Orchestra society).

  6. Interesting article, but i have a few comments:
    – 2018 results included 4.8m€ extroardinary, so without the profiit was 16.3 only. And even 14.3m€ only in 2019. The cash is also lower (27.7M€) due to dvd (1st since the small one in 2015) and investments. So in fact the PE is rather close of 19.5, wich is not really very cheap.
    – after several postponements, Carl G, will now open in spring, and missed the season pic in St Barth (Xmas/year end).
    – MLdL bought shs at 2000€ in 2011, but only because of a global deal, including a 40% investment in Groupe L Barriere (GBL). So the price was a bit artificial, and stayed aroud 1000/1200 € after that announce. Also he didn’t buy more shs to lower his average price, wich could means it’s not particularly cheap. The same kind of story occured in… 1991, when Jean-Marc Oury (CIP) bought shs at more than… 32’000 FRF (4900€)! (and sold le Gray in the same time).
    – A company, also listed (SIEHM) is owning mainly the Cannes’ hôtels walls. Even if more than 96% (+2% by board members) is owned by SFCMC, it gave a small discount for the holding status.
    – A family/low liquid company are often cheaper (Bolloré, Courtois SA….)
    from France

    1. – I agree that the normalized net income is probably around 15/16mn per year (what we have since 2015). However to value it you would need to take into account that they own the real estate.
      – Hopefully Carl G will contribute this year as in 2019 we only incurred the cost. So that should help a little
      – MLdL did not buy shares afterwards, how could he with the liquidity…? But it is true that it was a dual deal in 2011 and Barriere probably had to sell 10% of FCMC to finance the buyout of the 49% of Accord in Lucien Barriere.
      – a buy out of the minority below 2 294 per share will be tough as it is the valuation used for the buyout of Fimalac in 2015 (page 97 of the document or p97 de “l’attestation d’équite”). Here is the conclusion of the independant expert for the buyout, validated by the “Autorité des Marchés Financiers”: “Nous retiendrons 40,2M€ en valeur centrale, correspondant à la valeur extériorisée par les comparables boursiers”. 40.2mn for 10% thus 402mn pour 100% =>2300 euros per shares
      – the qatari bought their stake in 2008 (22.7%) and initially wanted to raise it to 40% but have not been able to. So I would not be afraid by a low bid to screw the minorities as the qatari wont be screwed. Do not forget that the float is not huge (6.2%)so there is not much incentive to screw us anyway…
      I guess we will find out by 29/06/2021 at the latest

  7. Thank you for presenting the idea. Did you have a chance to look at Société des Bains de Mer Monaco (MC0000031187)? It owns prime hotels/restaurants in Monaco. In recent years there was quite an effort to renovate which was not quite expensive. The Principality of Monaco owns a big chunk. Shares are more liquid than FCMC and continously traded currently around levels of EUR 60, but NAV could well be close to EUR 200/share.

      1. One remark: I wrote “In recent years there was quite an effort to renovate which was not quite expensive”. Of course renovation activity WAS expensive, but most of the heavy lifting seems to be done

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