July 24, 2021

Russian Roulette DIA

It’s the big day for DIA. This Wednesday, March 20, shareholders are called to a general meeting to vote on the future of the Spanish hard discount company close to bankruptcy. Distribuidora Internacional de Alimentación SA, alias DIA, the former flagship of Iberian distribution born in 1979 under the wing of Carrefour Spain, is, in fact, on the verge of insolvency, battered on the stock market, where the action has lost 90% of its value in less than eighteen months, strangled by debt and torn by a dispute between the management of the company and its main shareholder.

The company-wide takeover bid announced on February 5 by Russian oligarch Mikhail Fridman, who already holds 29.1% of the capital through his LetterOne investment fund, has sparked the war. Is this the only salvation or just a burial on the sly with redemption of tickets at discounted rates? We will have to decide, and quickly, because time is running out for the company without a penny in the cash register.

Two options on the table

The shareholders gathered this Wednesday in the salons of the Casa de América, in the center of Madrid, therefore have two options on the table. Current DIA CEO Borja de la Cierva, parachuted into the post last December, presents a five-year strategic plan to get the group out of the abyss, which lost 352.5 million euros last year. He pretends “Renew the brand” and “To reaffirm itself as the best local grocer”, with, at the end of the day, the sale of 100 million of non-strategic assets and a debt refinancing agreement of 912 million euros negotiated with the creditor banks, as well as a capital increase of 600 million, with the downstream from Morgan Stanley.

But the Russian billionaire, main shareholder of DIA, does not hear it that way. No question of diluting his shares in a capital increase: he prefers to launch an offer to acquire 100% of the shares with the promise of then injecting 500 million euros to relaunch the brand. To clear the field, Fridman’s men are calling for the management’s plan to be rejected and, with 29% of the shares already in hand, they are likely to have the upper hand when it comes time to vote.

Sling of small shareholders

Except that the revolt rumbles on the side of the small carriers who refuse to give themselves for vanquished. Indignant by the price of the Russian takeover bid, at 67 cents per share, when it was worth 6 euros in July 2017. They have been trying for weeks to count their forces and find a white knight to set up an alternative. “We cannot accept a takeover bid at such a price, we believe in the company and we refuse to sell it off, we are sure that it is worth more”, says Rafael del Castillo of the association of shareholders defenders of Dia (AADD), which brings together some 400 minority shareholders.

After having probed, without success it seems, a pact of small shareholders led by a member of the Halley family (at the origin of Carrefour-Promodès), del Castillo intends to propose this Wednesday the convening of an urgent extraordinary meeting to vote for a capital increase of 150 million euros, preferential for shareholders, which would keep the brand afloat while waiting to find a candidate to carry out a more advantageous counter-takeover bid. Some are already counting on the Carrefour group entering the scene, which could be interested in acquiring a network of stores well located in the heart of Spanish cities, to strengthen the deployment of the Carrefour Express brand.

Great potential

It must be said that, despite its difficulties, DIA is still appetizing, report analysts who attribute to the action an objective price of 2 euros. “The results show a bad strategy for a company with solid foundations that has been poorly managed but continues to have great potential, says Darío Garcia, analyst at XTB. We went from 101.2 million in profits in 2017 to 352.5 million in losses in 2018. The big problem is that it cannot consolidate its position against the entry of competition in its segment. “

The big problem is that Dia cannot consolidate its position against the entry of competition in its segment.

To this day, DIA is still one of the major players in the country’s distribution sector. With 3,474 establishments (and nearly 2,700 spread across Portugal, Argentina and Brazil), the company controls 7.3% of the Spanish market. It is number three behind the Valencian giant Mercadona (24.3%), after being overtaken by Carrefour (8.4%), which takes advantage of the difficulties of its competitor to widen the gap. All the more easily since the DIA stores have been doing poorly in recent weeks.

They suffer daily from the consequences of supplier payment difficulties and, due to a lack of supply, a number of references have disappeared from the shelves. So much so that, in some establishments, employees try to hide the gaps in the shelves by leaving empty crates here and there on the shelves or by overly lining up the same product, as in stores in Eastern Europe. before the fall of the Berlin Wall.

« Profit warning »

How did we get here ? wonder the small shareholders outraged by the collapse of the image of the sign. It was in October that the thunderbolt fell for them, with the publication of a profit alert, anticipating for the year 2018 a decrease in operating profit (Ebitda) of 30% compared to the previous year. The management of DIA, which had been headed for a few months by the man of confidence of the Russian shareholder, Stephan DuCharme, had just reviewed the accounts and detected anomalies. It announced a loss in sales volume, an increase in operating costs and a reformulation of the 2017 accounts which risked, she warned, leading to “A negative asset effect of around 70 million euros”.

It is stupor. The stock stalls and plunges into a spin, losing nearly 50% of its value during the day. Within the management team of DIA as on the side of the experts of the sector, some wonder. The company is indeed in a complicated financial situation and is actively working to refinance its debt, but why such an alarmist press release? What are Mikhail Fridman’s men playing at? Stephan DuCharme leaves management in December without giving an explanation. But the answer came a few months later, on February 5, with the announcement of a low cost takeover bid launched by LetterOne, the Luxembourg-domiciled fund that manages the interests of the Russian. The ridiculous price is justified by “Structural decline” the company. “DIA has missed out on the main changes in consumer trends”, LetterOne says in its press release.

“Orchestrated maneuver”

For some, the Russian billionaire’s strategy is obvious. After taking a position with the purchase of 10% of DIA shares in July 2017, he would have bet on the collapse of the company to drop its value and seize the rest of the capital at a lower cost. “This is a maneuver orchestrated thanks to the support of opportunistic funds which, for months, bet on the decline. It is not by chance, just look at the movements on the stock market. The share price, which was at 6 euros when it entered the scene, has continued to decline since ”, explains an industry specialist, who describes the maneuvers of half a dozen funds and also points to the advisory role of Goldman Sachs.

Russian oligarch Mikhail Fridman already owns 29.1% of Dia's capital through his LetterOne investment fund

Russian oligarch Mikhail Fridman already owns 29.1% of Dia’s capital through his LetterOne investment fundAlexander Zemlianichenko/AP/SIPA

The method would be known, it seems, to the Spanish anti-corruption prosecution, which, according to a document from the police services disclosed by the Spanish daily “El Economista”, suspected the Russian investor of DIA of being precisely the head of a specialized network which would cause the bankruptcy of companies to seize it at discounted prices. If we are to believe the elements of the investigation passed to the American justice, which took charge of the case, it would have already pushed into bankruptcy the Spanish digital services company Zed, following a modus operandi close to that which ‘it seems to apply today at DIA.

Chaotic diversification

In addition to the stock market torture to which the title is subjected, the misadventures of the Spanish distribution group are also “The result of an accumulation of strategy errors which made it vulnerable”, says marketing strategy consultant Javier Perez de Leza, founder of Future Retail. The small brand, launched in 1979 by members of the Carrefour Spain management team, nevertheless seemed solid. It had marked its difference with a “hard discount” format then unknown in the country, with simple and austere stores. Its rise in power was achieved through a large volume of franchises by counting on proximity to modest-sized areas in the city center, until the separation of Carrefour and the IPO in 2011.

The trouble came when DIA stopped believing in his own formula and began to abandon his core business to go into areas where he was not competent.

“It was then that the trouble arose, when DIA stopped believing in its own formula and began to abandon its core business to go into areas where it was not competent”, tells Javier Perez de Leza, who cites the acquisition, in 2013, of the German drugstore-perfume company Schlecker, renamed “Clarel”, then the takeover of various small supermarket chains, which have come to blur the DIA model by introducing new new formats, such as the wholesale chain Max Descuento, or DIA Plaza, which develops early products.

Diversification turned out to be chaotic and, as unease mounted among managers and franchisees who felt abandoned, management focused on the difficulties of international development, with the closure of its Chinese branch and the adverse effect of the devaluation of currencies in Argentina and Brazil.

While the problems accumulated, more or less camouflaged by an accounting qualified as imaginative, the strategic errors followed one another. The group thus decided to abandon its distributor brand and chose to increase its prices, at a time when Carrefour Express, Aldi or Lidl were precisely trying to enter the segment of local supermarkets. These mistakes are all the more incomprehensible as the sector is now wondering about the slowdown in the hypermarket model.

Despite all its weaknesses, DIA appears to be well positioned to take advantage of the situation, with a head start over other brands thanks to its strong network of neighborhood stores, well located and easy to access, which allow customers to ‘avoid taking your car. On the side of the small shareholders of DIA, we want to believe that the sign still has a future and that it is worth more than 67 cents per share.