CARREFOUR S.A.

CASE
CASE BRIEF

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Introduction
Carrefour S.A is Europes 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, Carrefours 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.

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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:

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 cant 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
Where, I

n+m

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

n+m

is the interbank rate for n+m years, I

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

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forward rates for each of the four currencies (kindly look at excel for more
detail):

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)

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 R EUR 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
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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):

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 be rai sed foreigncurrency (millions)=(750/Spot exchangerate 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:

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

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 ( millionseuros )=CouponratePrincipal raisedForward 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 (millions euros)=Principal raised foreign currencyForward 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.

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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):

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

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

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

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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