LetterOne Retail, the investment fund controlled by Russian businessman Mikhail Fridman, which owns 29% of the DIA Group, launched a voluntary takeover bid for all the shares it does not yet own, at 67 cents per share, representing a 56,1% increase over the closing price on Monday (43 cents).
The operation is part of a rescue plan, called "Making DIA a Leader," aimed at securing the future of the retail group. In addition to the takeover bid, this plan includes a commitment to support a €500 million capital increase, contingent on the positive outcome and subsequent settlement of the takeover bid and on DIA reaching an agreement with its creditor banks to establish a viable long-term capital strategy. In parallel, LetterOne Retail also plans to create a comprehensive transformation plan based on six pillars, overseen by LetterOne Retail, resulting in the complete conversion of the group over the next five years. " It is common knowledge that DIA is experiencing serious financial difficulties, and LetterOne Retail believes it urgently needs a transformation plan carried out by a management team with recognized global experience in the retail sector. The company needs a new vision, a new strategy, and a financial solution that addresses short-term liquidity requirements and guarantees DIA's long-term future ," LetterOne Retail stated in a press release.
The investment fund argues that the retail group that owns Minipreço missed the main changes in consumer trends, resulting in underperformance compared to its competitors and a consequent loss of market share, especially in Spain. " The group is currently in a structural decline and its brand has deteriorated significantly ," the statement further adds.
LetterOne Retail criticizes DIA's €600 million recapitalization plan, arguing that it " does not address the fundamental strategic, leadership and capital structure challenges " faced and exposes shareholders " to the risk of significant dilution without a viable long-term capital structure ."
The fund led by Mikhail Fridman believes that, under his leadership, “ DIA can re-emerge as a leading player in the food retail distribution sector in Spain, Brazil, Argentina and Portugal, to the benefit of all stakeholders, including customers, employees, franchisees, suppliers, creditors and shareholders ”.
The takeover bid requires regulatory approval and is contingent upon acceptance by other shareholders representing at least 35,5% of the capital. Furthermore, it is conditional upon no capital increase taking place before its completion.
LetterOne Retail's plan
It should be recalled that, last October, the DIA Group announced a review of its 2017 accounts and a profit warning for 2018. These facts, along with its high level of debt, have, in LetterOne's view, limited its ability to operate effectively on a daily basis and to invest in its future. The investment fund recalls the seven downgrades in the group's financial rating, from BBB- to CCC+, since then, as well as the 89,3% drop in the share price over the last 12 months.
The transformation plan presented by LetterOne is based on six fundamental pillars and includes a new commercial value proposition, price and promotion adjustments, a suitable store network strategy, new leadership and internal talent development, improved execution of retail operations, and investment in the brand and marketing. The Luxembourg fund assures that it will provide more details about this plan in the public takeover bid brochure, to be published " in due course ".
LetterOne Retail also indicates that it is willing to work with DIA's board of directors, creditor banks and other stakeholders in implementing this plan, which it believes not only addresses capital structure requirements but also provides the basis for it to re-emerge as a leading Spanish food retailer.
Audit of accounts
However, DIA's management team, the third in five months, commissioned EY to conduct a forensic audit of the accounts for the last few years, in order to guarantee the financial viability of the retail group and its capital expansion plan.
According to the newspaper Cinco Días, the objective is to determine whether or not there were fraudulent practices in the management of the company.
Financial sources confirmed to that newspaper that the group expects a definitive report in the second half of February, although its contents are not expected to be made public. In this way, the DIA Group intends to avoid any accounting surprises that could compromise the refinancing process under negotiation with the banks and the capital increase it hopes to complete before Easter.
Store closures and new investments
This week, the new strategic plan designed by DIA's management is expected to be presented. Sources close to the matter indicate that the group will announce an adjustment of its commercial area, which involves the closure, transformation, or transfer of 250 to 300 stores, in order to escape the threat of insolvency it faces, having ended 2018 with negative equity.
The newspaper El Confidencial reports that the plan is based on a cost-cutting strategy and an aggressive focus on private label brands. The five-year strategic plan also foresees a similar number of future store openings.
Meanwhile, El Economista cites sources within the group indicating that one billion euros will be invested over the next five years to make its stores much more attractive. Prices will be reduced to recover market share and make DIA more competitive. According to the latest available data from Kantar Worldpanel, the group had a market share of 7,4% in November 2018, eight tenths less than in the same month of 2017.
