March 7, 2019

Everyone wants to save Spanish retailer Dia

Spanish fire brigade (photo: Frantic00/Shutterstock)
Emergencia: L1 Retail evidently sees itself as part of Spain's retail fire brigade
Let us take a Ukrainian-born Russian oligarch and call him Mikhail Fridman. Let this self-made man set up an investment holding in London (LetterOne) with a retail arm in Luxembourg (L1 Retail).

Let him invest €700m for a minority stake in Spain's fourth-largest grocer, Dia. Then watch the share price of this soft discount-proximity retailer crash by more than 90 per cent on the Madrid stock exchange within a year.

How happy would you be, dear reader, if you were he, and what would you do to extricate yourself from this mess?

Why, it's simple, stupid: Tell L1 Retail to make a bid for Dia, propose a rights issue of €500m, and replace the existing Board with the best international retail talent that money can buy. Then give your new dream team five years to effect a turnaround and wait for your paper losses to turn into profit.

Sounds good, doesn't it? But life can be complicated, even for the rich and ruthless. There are shareholders and fiscal authorities to woo, stubborn board members to oust, and bankers to placate who could pull the plug on huge corporate debts. Worst of all, competitors, such as Lidl, Carrefour, Mercadona or Sonae, might make a counter-offer and start a bidding war.

As Dia, whose 6,157 stores in Spain, Portugal, Argentina and Brazil posted €9.4bn in gross sales last year, awaits its AGM on March 19 & 20, will Stephan DuCharme, managing partner at L1 Retail, be able to fulfil his master's wishes?

Mammoth task

Like a genie out of the bottle, the former boss and current Chairman of Russian retail giant X5 polished this Fridman enterprise shiny bright. Polyglot manager DuCharme is now trying to do the same at UK health & wellbeing retailer Holland & Barrett.

That's a lot to have on your plate, even when you have ex-Lidl CEO Karl-Heinz Holland and former Carrefour Deputy CFO Sergio Dias as comrades-in-arms. So we asked Mikhail Fridman's frontman how he rates his chances on the Iberian peninsula...


"Dia is a sleepy,
undermanaged company"

 

Stephan DuCharme, Managing Partner L1 Retail (photo: IgorE_L1 Retail)
Fridman's fixer: Stephan DuCharme
Mr DuCharme, it is estimated that Mikhail Fridman spent €700m building a 29-per-cent stake in Dia from mid-2017 to October 2018. Given that its share price fell by more than 90 per cent last year, is Mr Fridman losing his Midas touch, or is he a better investor in banks and oil than in retail?

Mikhail most certainly hasn't lost what you call his 'Midas touch', and the losses you mention are only paper ones. They do reflect, however, a pretty dramatic failure by the Board of Dia on an operational level and in terms of corporate governance. Apart from accounting irregularities and the restatement of earnings last year, all four of its country operations in Spain, Portugal, Brazil and Argentina show declines in like-for-like sales.

In Spain sales densities are a third of leading Spanish grocer Mercadona and half of Lidl España.

This is why we now want to install a world-class team who will take hold of the reins at this sleepy, undermanaged company.

Declining annual sales at Dia (source: LZ Retailytics)
Under pressure: Declining gross annual sales in millions of euros
L1 Retail started the bidding process for Dia on February 5. Your offer of 67 cents per share represents a 56-per-cent premium over the previous day's closing price on the Madrid bourse, valuing Dia's equity at €417m. How much more will you have to pay for full control?

Although we have made a bid for the whole company, we would theoretically be happy with a controlling stake of 51 per cent of the voting rights. However, our bid is subject to L1 Retail obtaining at least 50 per cent of the shares we don't already own, which is equivalent to a minimum stake of approximately 65 per cent. But, to answer your question, it would cost us around €300m to buy all of the remaining shares at the price we have offered.

So, if you include the price for his original 29-per-cent stake and the €500m rights issue we are proposing, the whole transaction could cost Mikhail Fridman around €1.5bn.

Part of Dia's problem is net debt of around €1.4bn. Won't Mr Fridman also have to assume heavy corporate liabilities?

That's a wrong way of looking at the situation because even a majority shareholder does not legally assume corporate debt.

Dia go checkout scene (photo: Dia Ibiza 11 Prensa)
Trump card: Dia boasts a huge international network of more than 6,150 neighbourhood stores, including franchisees. The former retail icon is almost ubiquitous on its home market in Spain
L1 Retail makes the rights issue at Dia dependent on various conditions. Such an outcome would provide you with the opportunity to reconstitute Dia's Board, including the departure of current CEO, Borja de la Cierva, who was only appointed to his present position in December. If Board members know that they are going to be replaced, won't they fight every proposition you make both tooth and nail?

Our winning the tender offer represents a rescue opportunity for Dia and release from a stressful situation for all concerned. It also addresses squarely the fact that Dia's current situation reflects the corporate governance failure that has occurred. We will use our large number of contacts in international retailing to create a world-class board of directors and management team.

This could include ex-Lidl top manager Karl-Heinz Holland, who joined L1 Retail in February/March 2017, former Carrefour Deputy CFO Sergio Dias, and me. We'd also love to have independent directors on the Board.

Dia & go (photo: Dia)
Promising new start: There are already around 100 "Dia & go" convenience stores in Spain
We have seen an email from Dia indicating that their Board will not decide on your offer until the Spanish Stock Exchange Authority (CNMV) has given a green light to your tender offer of February 5. Under Spanish law, the CNMV can take up to three months before coming to a decision. Given that you also have to win the support of the banks, isn't time simply against you?

We don't have the impression that the European Commission, CNMV, or the other financial authorities involved are dragging their feet. We have already received one anti-monopoly authorisation from Brazil and initial feedback from CNMV.

So what do you think the timeframe will be?

As far as we are concerned, we would do the deal tomorrow. But, realistically speaking, we hope that it would be possible to execute our Voluntary Tender Offer within three months of the announcement, in parallel with the L1 Retail-sponsored rights issue which we hope will be approved at Dia's AGM on March 19/20.

Local media, including Spanish newspaper Expansión, claim that Carrefour, Lidl, Mercadona and Sonae are interested in making a counter-bid. Do you believe that they will?

This is not something under our control. We think it is difficult for any party to assess the current situation at Dia from the outside. In this regard, our minority stake and our history give us our own assessment of the workings of the company. At around 59 cents per share, which is substantially below our offer, the market also clearly doesn't expect any counter-offer.

Logo of Horizon (photo: Horizon)
Since yesterday's launch of international alliance Horizon, Dia can cooperate with retail giants Metro, Auchan and Casino in "rendering services" to international suppliers...
But, if any counter-bids were to materialise, would you be prepared to up your offer? Or is the one you made on February 5 your final one?

Under Spanish law, there is no such thing as a final offer which is legally binding. However, we have zero intention of improving our offer at the moment because we believe that we have adequately valued Dia and its risks.

What risks are you referring to?

Dia requires a rescue package and our combination of a Voluntary Tender Offer, rights issue and turnaround take this reality into account. Dia is in need of a strategic, operating and financial turnaround.

Any concluding point you would like to raise?

We would love the German supplier community to follow us to Spain. In return we can offer long-term relationships and private-label partnerships. This is a win-win situation because our transformation team wants to focus on generating sales.


Read in German: "Karl-Heinz Holland soll neues Dia-Team verstärken" (paywall) by Mike Dawson on page 6 of Lebensmittel Zeitung, no. 10, 08.03.2019

Interested readers are also referred to an excellent assessment of Dia by LZ Retailytics:
Retailer Report: Dia in Europe (paywall)



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