March 7, 2019

Can Russian oligarch save Spanish retailer Dia?

Spanish fire brigade (photo: Frantic00/Shutterstock)
Emergencia: L1 Retail evidently sees itself as part of Spain's retail fire brigade
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 neighbourhood 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? The man Fridman has designated for the job is Stephan DuCharme, managing partner at L1 Retail.

But will this courtly Frenchman be able to fulfil his master's wishes? We asked him...

Fridman's game plan to date has certainly never lacked boldness: L1 Retail makes a bid for Dia, proposes a rights issue of €500m, and replaces the existing Board with the best international retail talent that money can buy. He has probably given his new dream team five years to effect a turnaround and is waiting impatiently for his paper losses to turn into profit.

Sounds almost too good to be true, doesn't it? After all, 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, 

Mammoth task

As former boss and current chairman of Russian market leader X5, DuCharme has already polished another retail investment of Fridman's shiny bright. The 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 ex-Lidl CEO Karl-Heinz Holland and former Carrefour Deputy CFO Sergio Dias are your comrades-in-arms. So how does Fridman's frontman rate his chances on the Iberian peninsula?

"Dia is a sleepy,
undermanaged company"


Stephan DuCharme, Managing Partner L1 Retail (photo: IgorE_L1 Retail)
IgorE_L1 Retail
Fridman's fixer: Stephan DuCharme
Monsieur DuCharme, Mikhail Fridman spent an estimated €700m on building a 29 per cent stake in Dia up to October 2018. Given that the share price fell by over 90 per cent last year, has he lost his Midas touch?
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)
In decline: Estimated gross annual sales at Dia in millions of euros (source: LZ Retailytics)
L1 Retail began to bid for Dia on February 5. Your 67 cent per share offer is 56 per cent up on the previous day's closing price on the Madrid bourse, valuing Dia's equity at €417m. How much more will full control cost you?
Although we've 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)
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. This would allow you to reconstitute its Board, including CEO Borja de la Cierva. If Board members know that they will be replaced, won't they fight your every proposition?
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 (photo: Dia)
We have seen an email from Dia that the Board won't decide your offer until the Spanish Stock Exchange Authority (CNMV) has agreed your tender offer of February 5. This could take three months. Given that you also need bank support, isn't time simply against you?
We don't have the impression that the European Commission, the 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 the 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 newspaper Expansión, claim that Carrefour, Lidl, Mercadona and Sonae are interested in making a counter-bid. Do you believe 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 up your offer? Or is that of 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?
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?
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.

Lebensmittel Zeitung with its online sisters (photo: LZ)
photo: LZ
Our German retail B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German: 'Karl-Heinz Holland soll neues Dia-Team verstärken' by international editor Mike Dawson on page 6 of Lebensmittel Zeitung, no. 10, 08.03.2019

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