Shadowfall short-sellers bet millions on 3i Group

ShadowFall Capital and Research, a short-seller, has placed a multi-million pound bet on FTSE 100 Private Equity Group 3i, based on the belief that its star company, European Discount Retail Chain Action, was significantly overvalued.

Action, a retailer of everything from massagers to crockery that sells all kinds of products, is one of the most successful leveraged acquisitions in history. In 2011, 3i spent €279 (£233) million in the European discount retailer. After 13 years of sales and profit growth, 3i has valued its 57.6 percent stake in Action at £14.8 Billion.

The chain, led by Hajir Hajji is so important to 3i it has become a proxy of the discounter’s performance. In the last year, Action’s phenomenal growth has led to a 64% rise in 3i shares. The company is now valued at £33.89.

ShadowFall believes 3i investors failed to realize the extent of Action’s margins being boosted by the inflation that is now declining.

Action is able to take advantage of this time delay by buying half of its goods months in advance. According to a 3i source, Action is now reducing its prices in order to attract more customers.

ShadowFall led by Matthew Earl – an investor nicknamed “The Dark Destroyer” (in the City) – has also questioned 3i’s practice of valuing Action on its books at 18.5 times underlying profit, as the average valuation for similar companies listed on the stock exchange has drifted down to 14.4 times.

Analysts from Citi stated in July that Action is conservatively valued. Action’s sales like-for-like have increased by 9.6 percent in the past year. Over the last 12 months, underlying profit increased by 23 percent to €1.88billion.

Shadowfall questions whether 3i overstates Action’s potential for growth in France, the biggest market where it intends to open 300 additional stores. The short-seller thinks that the expansion plans of Action’s competitors will limit Action’s potential. A source at 3i retorted the analysis as “nonsense”, and omitted Action’s superior purchasing power and lower prices.

According to S&P Global, short interest — an indicator of short-selling — is just below 1 percent of 3i’s stock.

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