3i Shares Crash 19% as Action Sales Slow Amid Middle East Inflation Fears

3i Group plc (LON: III) came under heavy selling pressure after its latest update exposed a problem investors could no longer ignore: Action, the discount retailer behind most of 3i’s recent value creation, is growing more slowly in some of its most important European markets.

The FTSE 100 investment firm’s shares dropped around 19%, falling about 450p to nearly 1,974p. That pushed the stock to its weakest level in more than two years and deepened a sharp reversal from its October high of £43.02.

The market reaction was not driven by weak annual numbers alone. In fact, 3i’s full-year results still showed strong returns. The concern was the latest trading signal from Action, where like-for-like sales growth slowed to 2.4% by 10 May, compared with 6.8% in the same period last year.

That slowdown matters because Action is not just another portfolio company for 3i. It is the core asset behind the group’s valuation. 3i valued its stake in Action at about £23.74 billion at the end of March, within a total portfolio worth roughly £31.8 billion.

Investors were especially focused on France and Germany, where Action reported flat like-for-like sales. Management pointed to weaker consumer confidence linked to the economic impact of the Middle East conflict, while cooler weather also hit seasonal product demand.

Fast-moving consumer goods continued to trade well, suggesting customers are still buying essential low-price items. But the weakness in seasonal categories raised questions about how much pressure European households are feeling as inflation risks and geopolitical uncertainty remain elevated.

Action’s performance was not weak across the board. Trading in the Netherlands, Belgium and Southern Europe was described as in line with or ahead of expectations. The retailer also continued its aggressive expansion, opening 69 new stores so far in 2026.

The company’s balance sheet also remains strong, with Action holding around €925 million in cash. For a retailer still expanding across Europe, that gives it room to keep investing even as short-term sales momentum slows.

For 2025, Action delivered 16% net sales growth, 4.9% like-for-like sales growth and 14% EBITDA growth. In the first three periods of 2026, sales rose to €4.01 billion from €3.52 billion a year earlier, while operating EBITDA increased to €498 million from €464 million.

The issue for shareholders is valuation. 3i continues to value Action using an unchanged post-discount EBITDA multiple of 18.5 times. When growth is strong, that premium can be easier to defend. When like-for-like sales slow, investors become more sensitive to whether the valuation is too optimistic.

3i has also increased its exposure to Action. During the year, the group lifted its stake from 57.9% to 65.4% through cash and non-cash transactions, including the issue of new 3i shares. That gives 3i more upside if Action performs well, but it also increases the stock’s sensitivity to any disappointment from the retailer.

To calm the market and take advantage of the wide discount in its own shares, 3i announced a £750 million share buyback programme. The company said the programme will run until no later than 31 December and shares purchased will be cancelled, reducing share capital.

The buyback is significant because 3i has not launched a major repurchase programme since 2005. It also comes after the stock moved to a steep discount to net asset value. 3i reported net asset value per share of 3,030p, while the market price fell to around 1,974p, leaving the shares trading roughly 34.5% below NAV.

On the headline numbers, 3i still delivered a strong year. Total return for the year ended 31 March came in at £5.30 billion, equal to 22% on opening shareholders’ funds. Net asset value per share rose from 2,542p to 3,030p, including a 77p gain from foreign exchange translation.

The private equity business generated a gross investment return of £5.30 billion, or 23%. Action alone contributed £4.51 billion, or 25% on its opening value, showing just how important the retailer remains to 3i’s overall performance.

There were also gains elsewhere in the portfolio. Royal Sanders delivered another strong year, while 3i pointed to solid performance across parts of its consumer and private label investments.

Realisation activity remained healthy. 3i sold MPM and MAIT, generating combined proceeds of £542 million. MPM delivered £395 million of proceeds and a 3.2x money multiple, while MAIT generated £147 million and a 2.8x money multiple.

The infrastructure business also improved, producing a gross investment return of £106 million, or 7%, compared with £52 million, or 3%, a year earlier. 3i Infrastructure announced the sale of TCR for proceeds of €1.1 billion, representing a 3.6x money multiple.

Scandlines generated a gross investment return of £55 million, or 10%, supported by resilient leisure demand. Freight volumes remained softer because of weaker economic conditions in Germany and Scandinavia.

Across the group, 3i received £1.9 billion of cash proceeds from its portfolio during the year. It ended March with liquidity of £1.86 billion, net debt of £547 million and gearing of just 2%, down from net debt of £771 million and gearing of 3% a year earlier.

The board recommended a second dividend of 48.0p per share, taking the total dividend for the year to 84.5p, up from 73.0p last year.

Chief executive Simon Borrows said the market environment remains complex, with heightened geopolitical risk from the unresolved Middle East situation. He also warned that inflation could rise over the coming months.

For investors, the debate now is whether the selloff has gone too far or whether the market is finally pricing in a slower growth path for Action. The retailer still has scale, cash, new store openings and a strong discount proposition. But 3i’s premium valuation story depends on Action continuing to compound sales and earnings at a pace the market can trust.

That makes the next few trading updates critical. A recovery in France and Germany could help rebuild confidence. More weakness in like-for-like sales, however, may keep pressure on 3i Group (LON: III) even with the buyback in place.

For readers tracking wider market moves, Swikblog has also covered recent pressure in major listed companies such as Tesla stock after earnings and delivery concerns.

External market coverage and company-related details were also reported by Bloomberg and QuotedData.

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