Société Fermière du Casino Municipal de Cannes - Euronext Paris: FCMC
|Jan 13, 2020|
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.
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.
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 email@example.com.