Short-seller ShadowFall takes bet against 3i Group

According to the Sunday Times, ShadowFall Capital has taken out the short position on the basis that European discount retail chain Action is significantly overvalued.

The FT noted that 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 €279m (£233m) in the retailer. After 13 year of growth in sales and profits 3i values its 57.6% stake in Action at £14.8bn.

The FT said the retail 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 growth has driven a 64% rise in 3i’s shares, which now trade at a record of 3,389p, valuing the company at £33bn.

The FT said ShadowFall believes 3i 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, it said. A 3i source told the FT that Action was now reducing prices to win more customers.

ShadowFall 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.

The FT said that 3i believes Action’s superior performance justifies the valuation. It pointed out that analysts from Citi said in July that Action was conservatively valued.

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 told the FT the analysis was "a nonsense" and ignored Action’s superior buying power and lower prices.

At 0950 BST, the shares were down 3.4% at 3,275p.