Short-seller Shadowfall bets millions against 3i Group

Short-seller ShadowFall Capital and Research has taken out a multimillion-pound bet against FTSE 100 private equity group 3i on the basis that the star company in its portfolio, the European discount retail chain Action, is significantly overvalued.
Action, which sells everything from massage guns to crockery, has been one of the most successful leveraged buyouts of all time. In 2011, 3i invested €279 million (£233 million) in the European discount retailer. Now, after 13 year of relentless growth in sales and profits 3i values its 57.6 per cent stake in Action at £14.8 billion
Led by Hajir Hajji, the chain is of such outsized significance to 3i that the private equity firm’s shares have become a proxy for the discounter’s performance. Over the past year, Action’s stellar growth has driven a 64 per cent rise in 3i’s shares, which now trade at a record of £33.89, valuing the company at £33 billion.
ShadowFall, which shot to prominence for its role in exposing fraud at payments processor Wirecard, believes 3i’s investors have failed to appreciate the extent to which Action’s margins have been boosted by inflation, which is now receding.
Half of the discounter’s goods are bought many months in advance, meaning Action can use that time lag to pocket the benefit of rising prices. A 3i source said Action was now reducing prices to win 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 in its books at 18.5 times underlying profits, because the average valuation of similar companies with shares on the stock market has drifted downwards to 14.4 times.
3i, led by chief executive Simon Borrows, believes Action’s superior performance justifies the valuation, and analysts from Citi said in July that Action was conservatively valued. In the year to date Action’s like for like sales have grown 9.6 per cent. Underlying profit rose 23 per cent to €1.88 billion over the past 12 months.
Shadowfall also questions whether 3i is overstating Action’s growth potential in France, its biggest market, where it plans to open more than 300 more stores. The short-seller believes the expansion plans of Action’s rivals will limit its potential. A 3i source retorted that the analysis was “a nonsense” and ignored Action’s superior buying power and lower prices.
Short interest — a proxy for short-selling — stands at just under 1 per cent of 3i’s shares, according to S&P Global.