US short-selling firm Muddy Waters has rejected the preliminary findings of a probe by France's AMF financial regulator into its criticism of retailer Casino. French regulator ends probe into supermarket Casino and short-seller Muddy Waters Published: Dec. 17, 2019 at 12:27 p.m. The comment from the short-seller comes days after Chinese search engine giant Baidu Inc decided to acquire JOYY’s domestic streaming platform YY Live for $3.36 billion in cash. Muddy Waters said the deal announcement came just as it was preparing to reveal that its year-long investigation shows YY Live is an “ecosystem of mirages”. Chinese social media platform Joyy on Thursday tried to fend off an attack by short-seller Muddy Waters, saying a report that sent its share price plunging was full of 'errors, unsubstantiated.

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(Bloomberg) -- Short seller Carson Block has had mixed results in 2019, but he’s ending the year with a bang.

Shares of NMC Health Plc, the Middle Eastern hospital operator that’s Block’s latest target, have slumped 33% since his Muddy Waters Capital LLC said Dec. 17 that the company is understating its debt and overstating its cash. NMC Health denied wrongdoing, said it would hire an accounting firm for a review and would pursue regulatory action against third parties that have tried to manipulate the share price.

The bet has been one of his most successful this year. Block, who made his name shorting Chinese shares, has targeted seven companies in 2019. That’s the most in the almost 10 years he’s been in the business, based on his publicly disclosed positions. While four of the stocks are down, two targets in Asia and one in Germany recovered from initial losses.

With equity markets at records, Muddy Waters is finding “more large, liquid problematic companies than before, but at the same time, increasing levels of investor apathy,” Block said by email.

“If you look at all the Muddy Waters stuff, no matter what you think of them, when they start their work on things there is something which triggers their work and that raises questions,” said Ian Ormiston, a fund manager at Merian Global Investors in London. “There are still hundreds of companies out there that probably merit attention.”

Here’s a round-up of Muddy Waters’ short targets in 2019 and how the shares fared:

NMC Health (report on Dec. 17)

In a sign of how seriously investors are taking his critique of London-listed NMC Health, trading in the stock has surged to an average of almost 4 million shares a day since the report, compared with 563,000 daily in the preceding three months. The company said the report is “false and misleading,” adding that it has a “track record of significant, open and increasingly detailed disclosure to the market.” NMC Health bought back shares the day after the report was published.

PeptiDream (report on Nov. 6)

Shares in Tokyo-listed PeptiDream Inc. fell 4% on Nov. 7 but have recovered and are up 5.8% since the short seller questioned the level of activity at the company’s drug development partnerships with pharmaceutical companies. PeptiDream disputed the contents of the report, saying it holds a “completely different view.” The company said its 101 programs are all active programs, with no dead or dormant ones.

Corestate (position disclosed on Oct. 16)

Corestate Capital Holding SA fell 19% in Frankfurt the day Muddy Waters revealed in a filing that it’s shorting the real estate company. It’s erased the losses and now is up 2.9% since the disclosure. The firm didn’t publish a report outlining its case, a new approach Muddy Waters has taken in France and Germany. Regulators in those countries have responded to short sellers’ reports of corporate misdeeds by investigating the short sellers for possible market manipulation. Corestate routinely declines to comment on investor motives, a spokesman said at the time.

Burford Capital (report on Aug. 7)

London-listed Burford Capital Ltd. slid 46% on Aug. 7 after Muddy Waters said the litigation-finance company overstates the returns on its investments and has questionable financial reporting and governance. The stock is still down 36% since the report. Burford said the short seller’s critique was “false and misleading.” Chief Executive Officer Christopher Bogart and Chief Investment Officer Jonathan Molot bought shares in the days after the report was published, and named a new chief financial officer to replace Elizabeth O’Connell, who is married to Bogart.

Anta Sports (report on July 7)

Anta Sports Products Ltd. has surged 28% in Hong Kong since Muddy Waters said it’s shorting the stock because of concerns over its financial reporting and relationship with distributors. Anta said the report contained “untrue and misleading information.” Other short sellers also have failed in efforts to deflate the stock.

Solutions 30 (position disclosed on May 18)

Solutions 30 SE dropped 25% on the first day after a filing showed Muddy Waters was shorting shares in the Paris-listed technology-services company, and it’s still down 18%. It’s another case in which the short seller didn’t publicly discuss its investment thesis. France’s market regulator investigated Muddy Waters for a 2015 report detailing its bearish investment thesis on Casino Guichard-Perrachon SA; the watchdog closed the probe this month with a warning to both Muddy Waters and Casino. Solutions 30 said it remains confident in its business model.

Inogen (report on Feb. 8)

Inogen Inc. ended the day down 2.2% in New York after the short seller’s report, but it’s now fallen 51%. Muddy Waters said the health-care product supplier will likely hit peak sales this year if not in 2020. The company subsequently cut its 2019 revenue forecast twice, each time below the lowest analyst estimate.

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Phil Serafino, Namitha Jagadeesh

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.

Groupe Casino (CO FP) is one of the most overvalued and misunderstood companies we have ever come across. The basic problem with Casino is that its financial statements are literally meaningless to understanding the company’s (poor) health. They do not distinguish between what Casino owns and what it owes. (Spoiler: we estimate Casino’s LTM leverage ratio at 8.9x.)

Casino’s controlling shareholder Jean-Charles Naouri is a genius. He won first prizes in France’s high school Latin and Greek exams, completed his baccalaureate degree at 15, and earned a PhD in math in only one year. Like the geniuses who founded the hedge fund Long-Term Capital Management, which spectacularly collapsed, Mr. Naouri has an affinity for leverage. One would expect Casino to be a relatively boring hypermarket retailer; however, together with its parent, Rallye SA (RAL FP), Casino increasingly resembles a highly levered hedge fund. One example is Casino’s total return swaps on listed equities, which we estimate have a mark-to-market loss of approximately €500 million.

Casino and Rallye are now experiencing their version of a “six sigma event”, with emerging markets (80% of consolidated EBITDA) unwinding, currencies selling-off, and a sharply deteriorating core business. Casino obfuscates these problems by (i) adding complexity to its already convoluted structure and financials, (ii) engaging in financial engineering to improve the optics of its financials, and (iii) by hollowing out the productive value of the businesses in order to keep Rallye from collapsing.

Our report peels away many layers of the onion to show that Casino is dangerously leveraged, and is being managed for the very short-term. We explain that Casino’s shares are worth as little as €6.91, and correspondingly, the shares of Rallye are likely going to zero. If Casino trades at our estimated value of €6.91, the recovery on Rallye’s bonds should be about €0.15.

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