CARREFOUR S.A.

CASE
CASE BRIEF

1|Applied Corporate Finance

Introduction
Carrefour S.A is Europe’s largest retailer based in France and is maintaining its retail operation
in 26 countries. At the core of Carrefour strategy lays the concept of “Hypermarket”.
Hypermarket combines supermarket, drugstore, discount store and gas station into one
massive and one stop shopping megastore. By leveraging the idea of “Hypermarket”, Carrefour
expanded rapidly inside and outside France adding 4600 new stores in time period of 10 years
comprising of 1992 to 2001. In addition to increased number of new stores, Carrefour’s
expansion was also fuelled by mergers and acquisitions with other retailing companies i.e.
Euromarche and Montlaur. According to Mr Daniel Bernard CEO of Carrefour, the company is
going to maintain its growth trajectory. However, in order to finance its growth it is in an
immediate need of 750 million euro debt financing. Historically, Carrefour management
preferred to fund capital needs in the same currency as the respective operation activities.
However, over the course of 1997-2001 euro exchange rates had depreciated against most
major currencies. If this trend continues than payment of foreign currency denominated debt
with euro denominated cash flows will become increasingly expensive. On the other hand,
investment banks have advised Carrefour to consider borrowing in British Pound sterling
through the euro-bond market to benefit from opportunity that has risen in that currency. The
main issue is that Carrefour management must consider the bond denomination decision
which will result in least cost by considering forward interest rates and exchange rates.
However, the effect of current interest, interest rate and exchange rates will be critical to the
decision.

Analysis and Recommendation

To determine the least costly method of borrowing 750 million Euros we first calculated the
forward interest rates; then through forward interest rates we calculated forward exchange
rates; then we determined the payments that would be incurred if we borrowed in different
currencies; then we recalculated those payments in Euros (through exchange rates) and then
finally determined the least costly method/currency to borrow in.

Now we will explain our procedure in detail.

2|Applied Corporate Finance

Interbank offer rate and Forward rates
Interbank offer rates for maturity reaching from 1 year to 10 years can be viewed in the
following table:

Maturity No of years from initial date EUR GBP CHF USD

1 year 1 3.514% 4.258% 1.125% 2.099%
2 year 2 3.816% 4.622% 1.713% 2.767%
3 year 3 4.110% 4.910% 2.172% 3.432%
4 year 4 4.342% 5.088% 2.498% 3.922%
5 year 5 4.530% 5.190% 2.743% 4.308%
6 year 6 4.688% 5.249% 2.948% 4.619%
7 year 7 4.819% 5.292% 3.120% 4.873%
8 year 8 4.928% 5.331% 3.267% 5.081%
9 year 9 5.017% 5.358% 3.394% 5.264%
10 year 10 5.087% 5.374% 3.499% 5.413%

Interbank offer rates will be used in the calculation of forward interest rates as the opportunity
cost, as Carrefour foregoes the opportunity to deposit money and earn these rates.

But we can’t use the interbank rates as we need to calculate forward exchange rates, and for
calculating forward exchange rates we will need forward interest rates. Forward interest
rates for each year can be calculated from the given interbank offer rate by using the
assumption that the interbank offer rate follows the zero-curve fixed to floating swap rates
formula. Following is the formula we used to arrive at the forward rates,

(1+ I n+m)^n+m = (1+ Y n) ^n *(1+ I m) ^m

Where, I n+m is the interbank rate for n+m years, I m is the interbank rate for m years and Y n is
the forward rate the end of year n. Also, n should be less than m for calculation purpose.
Suppose we want to determine the 2 year forward rate for Euro currency; the calculation is as
follows: ((1.03816)^2)/(1.03514^1))-1 which will give you 4.119%. Similarly we built the whole
table for the 4 currencies. Following table presents the summary of the forward rates for each
of the four currencies (kindly look at excel for more detail):

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 Forward Interest Rates
1 Year Forward Risk Free rate by currency denomication

Maturity No of years from initial date EUR GBP CHF USD

1 year 1 3.514% 4.258% 1.125% 2.099%
2 year 2 4.119% 4.987% 2.304% 3.439%
3 year 3 4.701% 5.488% 3.096% 4.775%
4 year 4 5.041% 5.624% 3.482% 5.406%
5 year 5 5.285% 5.599% 3.729% 5.866%
6 year 6 5.482% 5.544% 3.979% 6.188%
7 year 7 5.608% 5.550% 4.158% 6.410%
8 year 8 5.694% 5.604% 4.302% 6.549%
9 year 9 5.732% 5.574% 4.416% 6.740%
10 year 10 5.719% 5.518% 4.449% 6.764%

Spot and Forward exchange rates:

Following table summarizes the spot exchange rates for the 4 major currencies in which
Carrefour can secure the loan (Note: the base currency is euro)

GBP CHF USD

Euro 1.593 0.688 1.020

Since we have calculated forward interest rates (see above), we can now calculate the forward
exchange rates through the following formula:

FT(F/EUR) = SFR/EUR*(1+RF,T)T/(1+REUR,T)T
Where, FT(F/EUR) represents the forward exchange rate of the exchange rate at the end of a
period, SFR/EUR is the spot exchange rate of the foreign currency (which are given above), RF is
the risk free rate of return for foreign denominated deposit as determined by the interbank
interest rate and REUR is the risk free rate of return as determined by the interbank interest rate
for euro denominated deposit. Note the rates over here will be the forward rates for the
respective time period that means suppose we want to calculate the forward 2 year exchange
rate of pounds. The calculation will be as follows: 1.593 * ((1.03514)^1)/(1.04258)^1)) which
will give a 2 year forward exchange rate of 1.582. %. Similarly we built the whole table for the
4 currencies. Following table presents the summary of the forward exchange rates for each of
the four currencies (kindly look at excel for more detail):

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 1 Year Forward Exchange Rates
(Base Currency: Euro)

Maturity EUR GBP CHF USD

1 year 1.000 1.593 0.688 1.020
2 year 1.000 1.582 0.704 1.034
3 year 1.000 1.567 0.713 1.033
4 year 1.000 1.558 0.721 1.018
5 year 1.000 1.558 0.730 1.006
6 year 1.000 1.569 0.741 0.992
7 year 1.000 1.587 0.750 0.980
8 year 1.000 1.599 0.758 0.967
9 year 1.000 1.604 0.765 0.956
10 year 1.000 1.615 0.770 0.937

Payments
If company wishes to raise capital in foreign currency, the total amount to be raised will be
determined on the basis of spot exchange rates. So,

𝑷𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍 𝒕𝒐 𝒃𝒆 𝒓𝒂𝒊𝒔𝒆𝒅 𝒊𝒏 𝒇𝒐𝒓𝒆𝒊𝒈𝒏 𝒄𝒖𝒓𝒓𝒆𝒏𝒄𝒚 (𝒎𝒊𝒍𝒍𝒊𝒐𝒏𝒔)

= (750/ 𝑆𝑝𝑜𝑡 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 𝑓𝑜𝑟 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦) 𝑚𝑖𝑙𝑙𝑖𝑜𝑛𝑠

If it chooses to borrow simply in Euros then it would simply be 750 million Euros.

The principles in different currencies will be:

EUR 750 million in Foreign Currencies

Currency Amount (in millions)

Euro 750
British Pounds 470.810
Swiss Francs 1,090.116
U.S. Dollars 735.294

Also the coupon rates in the 4 currencies are as follows:

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Coupon Rate (10 years) for borrwoing in following Currencies

Currency Coupon Rate

Euro 5.250%
British Pounds 5.375%
Swiss Francs 3.625%
U.S. Dollars 5.500%

Then the coupon payments will be made on the basis of the coupon rate for foreign currency,
principal raised at the start and the forward exchange rates of that currency such that,

𝑪𝒐𝒖𝒑𝒐𝒏 𝒑𝒂𝒚𝒎𝒆𝒏𝒕 (𝒎𝒊𝒍𝒍𝒊𝒐𝒏𝒔 𝒆𝒖𝒓𝒐𝒔)

= 𝐶𝑜𝑢𝑝𝑜𝑛 𝑟𝑎𝑡𝑒 ∗ 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑟𝑎𝑖𝑠𝑒𝑑 ∗ 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒

The initial principal raised at the start will be repaid at the end of the term of bond. The
principal amount repaid in term of euro will be determined by the forward at the end of the 10
year period.

𝑨𝒎𝒐𝒖𝒏𝒕 𝒓𝒆𝒑𝒂𝒊𝒅 𝒊𝒏 (𝒎𝒊𝒍𝒍𝒊𝒐𝒏𝒔 𝒆𝒖𝒓𝒐𝒔)

= 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑟𝑎𝑖𝑠𝑒𝑑 𝑖𝑛 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦
∗ 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑟𝑎𝑡𝑒 𝑎𝑡 𝑒𝑛𝑑 𝑜𝑓 𝑒𝑛𝑑 𝑜𝑓 10 𝑦𝑒𝑎𝑟𝑠

Assumptions

Annual coupon payments will be made as it is conventional in the euro bond market.

The interbank offer rates are assumed to follow zero-curve fixed to floating swap rate
assumption.

Comparison will be made in Euros.

Interbank offer rate are locked for the calculation purpose and they will not change.

All of debt will be financed in only one currency.

Using all this we got the following results with borrowing in Euros (kindly see Excel for more
clarity):

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Year 1 2 3 4 5 6 7 8 9 10 Total Cost Incurred In Euros

Payments in Euros 39.38 39.38 39.38 39.38 39.38 39.38 39.38 39.38 39.38 789.38 1,143.75

Next, we got the following results with borrowing in Pounds (kindly see Excel for more clarity):

Cash Flows Incurred (in millions) by borrowing in British Pounds (470.8 pounds)

Year 1 2 3 4 5 6 7 8 9 10 Total Cost Incurred In Euros

Payments in Pounds 25.31 25.31 25.31 25.31 25.31 25.31 25.31 25.31 25.31 496.12

Payment In Euros 40.31 40.02 39.65 39.42 39.43 39.72 40.17 40.47 40.59 800.99 1,160.76

Next, we got the following results with borrowing in Swiss Francs (kindly see Excel for more
clarity):

Cash Flows Incurred (in millions) by borrowing in Swiss Francs (1,090.116 million)

Year 1 2 3 4 5 6 7 8 9 10 Total Cost Incurred In Euros

Payments in Swiss Francs 39.52 39.52 39.52 39.52 39.52 39.52 39.52 39.52 39.52 39.52

Payment In Euros 27.19 27.83 28.16 28.48 28.86 29.29 29.63 29.95 30.23 1,120.55 1,380.17

Next, we got the following results with borrowing in dollars (kindly see Excel for more clarity):

7|Applied Corporate Finance

 Cash Flows Incurred (in millions) by borrowing in U.S. Dollars (735.294 million)

Year 1 2 3 4 5 6 7 8 9 10 Total Cost Incurred In Euros

Payments in Dollars 40.44 40.44 40.44 40.44 40.44 40.44 40.44 40.44 40.44 40.44

Payment In Euros 41.25 41.82 41.79 41.16 40.68 40.13 39.63 39.12 38.68 773.17 1,137.44

Final Solution:
As we can see in the tables above the lowest cost incurred is by borrowing in U.S.
dollars (Cost incurred in Euros 1, 1 37.44 million Euros). Hence, we recommend borrowing in
U.S. Dollars.

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