Dia majority shareholder could hold off bid for pricing advantage - bankers
07 SEP 2018
- Short-selling pressure and restructuring need could lower takeout price
- Bid after January would allow L1 to offer lower price
Dia’s [BME:DIA] 25% shareholder LetterOne (L1) will be able to buy the Spanish supermarket chain for a much more attractive price if it holds fire on a full offer and waits for its shares to fall, said two bankers familiar with the situation.
The discount chain is incompatible with the stock market right now as it needs deep structural changes, said the first banker. The company will receive a take-private offer at some point, although it is not clear when, agreed a Spanish institutional investor who has studied the situation but decided against taking a position in Dia.
L1’s last stake purchase – 31m shares or 5% - was made at EUR 4.363 per share on 18 January. Under the Spanish takeover code, any offer launched within 12 months of that deal would have to be at least at that price.
If L1 waited until well into 2019, the combination of short-selling in Dia’s stock and poor business performance would yield a much more attractive price, the first banker said. EUR 2 per share could be a reasonable expectation, this banker believed. This would also save considerable funds for a restructuring, this banker added.
Taking Dia private and reducing its footprint would be a valid option given its current performance, said the second banker familiar. Heavy short selling means waiting to launch a bid would be a sensible plan, this banker added.
Structural changes in Spain’s retail market mean that the company has received heavy short-selling pressure, said both bankers and the investor.
Ten hedge funds have disclosed short positions in Dia to Spain’s National Securities Market Commission (CNMV), ranging from 0.5% to 1.93%. The cumulative total of the shorts is 12.26%.
Dia’s shares are currently trading at EUR 1.85, towards the low end of its 52-week range of EUR 1.81 to EUR 5.36. The shares have been trading down since August 2017. The chain currently has a market capitalisation of EUR 1.16bn.
On fundamentals, the company is probably worth somewhere in the range of EUR 1.2 to EUR 1.5 per share, said the institutional investor.
L1 rumours
L1 has been widely rumoured to be considering a takeover of Dia since increasing its stake to 25% in January, with rumours reaching fever pitch over August. On its website, L1 says its objective is to “buy and build investments that stand the test of time and create value for all our partners and stakeholders.”
The co-founder of L1 is Mikhail Fridman, who was born in Ukraine and founded the ABHH group, which is based in Luxembourg and invests in banking groups. He moved into retail in the 1990s and founded X5 Retail Group [MCX:FIVE], the top food retailer in Russia.
Ricardo Curras, was terminated as Dia CEO over August. According to local press, Fridman wanted Curras’ removal. However, there are credible rumours that Curras was suspected of helping L1 develop its strategy for the company, said a Madrid-based banker.
Dia’s discount supermarket business did very well in Spain during the crisis years, but has been suffering since Spain’s economy started growing again in 2014. This has been due to a combination of discount-orientated shoppers switching to rival German discount chain Lidl, while shoppers opting to go upmarket started shopping at Mercadona, said the investor.
Lidl started a price war, which has been hurting Dia’s margins, said the first banker. Meanwhile, the company is facing increasing competition from online delivery services and will face more challenges in the future, said a second Madrid-based banker.
Dia closed the first half of the year with an adjusted EBITDA of EUR 225.7m, down 19.1% on the year. Its net debt at the end of the period was EUR 1.23bn, up 20.6%. Its cash and cash equivalents at the end of the period were EUR 172.8m, down 15.6%.
On one hand, the company has implemented a “textbook” M&A strategy in response to the downturn, the first banker familiar said. It has exited foreign markets to focus on Spain and Brazil, with a residual business in Argentina, this banker said.
Management, however, has poorly implemented store redesigns, said the investor. Clients have become disappointed with the shabbiness of many of its supermarkets, agreed the first banker familiar.
If L1 does decide to take Dia private, its best bet would be to buy it as cheaply as possible and then pour money into an aggressive restructuring, said this banker. The company would have to be a turnaround play, agreed the second banker familiar.
Over August, the Spanish press reported that Amazon [NASDAQ:AMZN] might make a play for the company. Most people assumed this report was fake news at the time, said a person familiar with Dia.
Amazon has other priorities, said the first baker familiar. Finding strategic buyers for Dia would be extremely difficult given the poor trading environment, agreed the second banker familiar.
Dia and Amazon declined to comment. Letter One did not respond to requests to comment.