UPDATE 2-Knight Vinke urges Carrefour to improve governance

Tue May 31, 2011 1:39pm EDT

* Carrefour CEO has lost credibility, says Knight Vinke

* Vinke will support Dia spin off, not seeking board seat

* Adds Carrefour must focus on turnaround plan

* Vinke says not convinced by possible Brazil deal

(Adds quotes, details, background)

By Dominique Vidalon

PARIS, May 31 (Reuters) - Carrefour boss Lars Olofsson needs to resist pressure from its top shareholders Colony Capital and luxury mogul Bernard Arnault to regain credibility with minority investors, U.S. activist fund Knight Vinke said on Tuesday.

The U.S. asset manager, which earlier this month led a successful rebellion against Carrefour's plans to spin off property assets, said the world's second-biggest retailer needed to improve corporate governance and consult more with smaller shareholders.

The dissident investor also expressed reservations about a possible merger of Carrefour's Brazilian business and local rival Pao de Acucar. [ID:nLDE74U08Q]

Knight Vinke founder and chief executive Eric Knight circulated during the meeting a letter he had sent Carrefour Supervisory Board Chairman Amaury de Seze to voice concern that a possible merger could be dilutive to Carrefour shareholders, given "the high multiples" of Pao de Acucar.

However, Knight said it would be a disaster if Olofsson left Carrefour because it must deliver on his turnaround plan for the business.

"Carrefour's recovery plan is crucial and its success could create enormous value," Knight told journalists.

"Governance is a main problem at Carrefour and management has lost some of its credibility but it would be a disaster if Olofsson left...Lars Olofsson must be given enough time to see if this (the turnaround plan) works," he added.

DIA SPINOFF FAVORED

Olofsson has put his job on the line by taking the reins of the French business, which accounts for about 40 percent of sales, and is spearheading the rollout of new format hypermarkets -- the heart of its recovery strategy.

Carrefour, weakened by two profit warnings last year, has also faced a series of defections by top managers and a board member due to dissent over the benefits of the property deal.

Critics of Carrefour argue the group is too influenced by top shareholder Blue Capital, which combines luxury billionaire Arnault and U.S. real estate specialists Colony Capital.

Blue Capital, which owns about 13.5 percent of the equity and 20 percent of the voting rights at Carrefour, was a driving force behind Carrefour's plans to spin off 25 percent of its European property assets and all of its Dia discount chain.

The duo is now down 40 percent on their 2007 investments and is pushing for ways to boost the value of the business.

Knight Vinke, which owns 1.5 percent of Carrefour's equity and has a track record of pushing for change at major companies, opposed the property spin off, saying it could weaken the group's competitive position.

Along with other interest groups, it forced Carrefour to postpone the property listing. [ID:nLDE74407Z]

Knight Vinke said it would vote in favour of the demerger of discount chain Dia at Carrefour's annual shareholder meeting on June 21, and would not seek a seat on the company's board.

"The big benefit of the Dia spin-off in our view is that it will allow Dia's management to focus on Dia's recovery and Carrefour to focus on its turnaround," Knight said.

'PIECEMEAL' APPROACH FEARED

Knight revealed he had asked Carrefour for a board seat in December but had been turned down. He did not plan to again ask at the June 21 meeting.

"Today the group is sufficiently destabilised... We are seeking changes but in a consensual manner," he said

"We do not want to destabilise a large group like Carrefour, which is France's number one private sector employer."

Knight stressed it would be premature to take a firm position on the Pao de Acucar (CBD.N)(PCAR4.SA) deal speculation given that Carrefour has yet to make anything public.

He nevertheless told journalists that a "piecemeal" approach to the sale of Carrefour's non-European assets would not create value.

"If the board wants today to do a tranformational deal, basically merge these two Brazilian businesses, create a $12 billion group whatever, you might as well lump the other ones (non-European countries) in there, make a $20 billion group and have it listed," he said.

"But first of all we need the board to confirm this is something (a Brazil sale) they are looking at. We see this as an alternative," he added.

Knight Vinke typically buys small stakes in large European companies and then persuades other investors to join its campaign to change the target's strategy.

Since Knight Vinke was founded in 2003, it has been credited with driving through change at companies including banking group HSBC (HSBA.L), oil giant Royal Dutch Shell (RDSa.L), French utility Suez (GSZ.PA) and Dutch media group VNU. (Reporting by Dominique Vidalon, Writing by Mark Potter, Editing by Paul Sandle and Jon Loades-Carter)