Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

If there was a textbook way to fend off an assault from a short seller, Casino's reaction over the past three months would hardly be it.

Repulsing Block
Casino shares are up almost 15% since Muddy Waters's report in December
Source: Bloomberg News

The French grocer is under attack from Carson Block's Muddy Waters. The short-seller contends that Casino is using financial engineering to mask a deterioration in its core French retail business, and that shareholder Rallye (a holding company controlled by Casino's chairman, Jean-Charles Naouri) has too much debt, and depends on Casino's dividend stream to make interest payments. The retailer has dismissed these allegations.

Yet, on Monday, Standard and Poor's cut Casino's rating to junk.

The downgrade follows Casino's announcement earlier this month of a 35 percent drop in annual profit to 1.45 billion euros ($1.6 billion) as its Brazilian business was squeezed by rising prices and weak sales growth. The retailer had already warned in January that 2015 earnings would be lower than analyst estimates, a move that had sent the shares to the lowest in more than two decades.

So in a way, S&P is just catching up. It's still unhelpful, though not terminal.

The downgrade will only increase the cost of servicing the company's bond debt by less than 20 million euros (before tax) this year, according to the retailer. Next year, that figure will rise to 70 million euros. That's a fraction of Casino's 838 million euros of cash flow from its French operations alone.

To reduce its 6.1 billion euros of net debt, Casino is racing to raise 4 billion euros by selling some of its most profitable businesses, including its grocery operations in Thailand and Vietnam.

While the disposal makes sense, divesting these businesses will make Casino even more reliant on France and its problematic Brazilian operation.

Revenue reach
France and Brazil dominate Casino's revenue
Source: Bloomberg

Casino said on Monday the situation in Brazil is stabilizing, and it expects Ebitda at its French unit to rise 24 percent to 900 million euros in 2016. Casino is confident of meeting that target -- but it looks optimistic given the stiff competition the retailer faces in that market.

For now, investors look to be giving the company the benefit of the doubt. The stock has risen 15 percent since Muddy Waters' report in December, which the grocer claims justifies its defense. At 6 percent its dividend yield is still more than twice the average.

That should buy Casino some more time. But in the face of Muddy Waters' attack, it can't afford any more earnings disappointments or ratings downgrades.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andrea Felsted in London at

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