Shadowfall Capital and Research has taken out a multimillion-pound short position against 3i, the largest investment trust in the UK, arguing that its largest holding, Action, is overvalued.
FTSE 100 private equity group 3i has been invested in Action for over a decade, which operates close to 3,000 stores across 12 European countries like Germany, the Netherlands and France.
The retailer has grown tremendously in the time, being largely responsible for 3i’s stock price skyrocking almost 14 times over the last 12 years.
However, short seller Shadowfall, which shot to fame after exposing fraud at payments service Wirecard, has argued that the discount retail chain at the centre of the private equity trust is significantly overvalued and begun a significant short squeeze on 3i, according to the Sunday Times.
In 3i’s full-year results from May, the trust valued its 54.8 per cent private equity stake in Action at £14.2bn, creating an implied price tag for the supermarket at around £26bn, above Tesco’s current market cap of £25bn.
The market is valuing Action even higher than that, with 3i’s share price trading 51 per cent above what the trust values its underlying assets as being worth.
Shadowfall argued that the market has failed to take into account how much Action’s margins were boosted by the inflationary spike over the last few years, rather than being based upon solid growth.
Meanwhile, the short seller also called into question 3i’s method of valuing the discount retailer at 18.5 times underlying profits, as the value for listed competitors of Action is now closer to 14.4 times.
Furthermore, Shadowfall also said that 3i might be overstating the retailer’s growth plan in France, where it plans to open over 300 stores, due to the expansion plans of its rivals.
A 3i source said that the analysis was “a nonsense” and failed to take into Action’s strong buying power and lower prices than rivals.
3i Group declined to comment when asked about the report.