A Russian Billionaire’s $1.7 Billion Grocery Spree

(Bloomberg Opinion) -- It’s Mikhail Fridman to the rescue. The Russian billionaire is swooping on ailing Spanish grocer Distribuidora Internacional de Alimentacion SA with a punchy takeover offer that has given a fillip to the stock after months of pain.

The contrarian bid is driven partly by opportunism and partly by the need to stop the rot. DIA will have a job on its hands to stay independent or to force Fridman to increase his offer.

This is no quixotic move: Fridman has assembled a high-powered team of executives from retailers like France’s Carrefour SA and German discounter Lidl to oversee the investment.

A Russian Billionaire’s $1.7 Billion Grocery Spree

Prior to the assault, DIA’s market value had fallen 95 percent from a peak of 5 billion euros ($5.7 billion) in 2015 as revenue shrank and borrowings piled up. The retailer chewed through two CEOs last year, and has had to restate its accounts. With support from its banks looking increasingly fragile, Morgan Stanley agreed in December to backstop a 600 million-euro stock sale. That pulled the grocer back from the brink.

A Russian Billionaire’s $1.7 Billion Grocery Spree

Fridman’s L1 Retail has built a 29 percent stake in the company over the last 18 months or so, spending more than 700 million euros in the process. That investment is deeply underwater. No wonder the billionaire is fed up. He wants to torpedo the Morgan Stanley recapitalization, take control of management, and fix the capital structure with his own 500 million-euro cash injection.

This alternative plan is conditional on “reaching a satisfactory agreement with DIA’s lending banks.” That implies he wants them to cut the company some slack, most likely by giving the borrower more time to repay its debts.

There’s little doubt DIA needs money, turnaround expertise and an experienced and patient parent. Fridman’s offer provides that. The billionaire’s investment horizons are suitably long-term: his investment vehicle has no fixed holding period. Assume a decade-long involvement, and it might aim to make an internal rate of return in the mid-teens percent.

To get close to that will be a challenge. Take L1’s past investment, the cost of today’s bid, and the capital injection, and Fridman’s group will be on the hook for about 1.5 billion euros, or $1.7 billion. To get a 15 percent IRR will require a major turnaround.

At 67 euro cents a share, the offer is 56 percent above DIA’s closing price on Monday and 19 percent more than the three-month average. It values the group at 1.8 billion euros, including assumed net debt – about five times estimated Ebitda for 2019. For comparison, the big European grocers trade at anywhere between five and eight times forward Ebitda.

DIA has few options. Fridman isn’t after 100 percent of the company, but wants to get to a minimum 65 percent stake. A few desperate shareholders wanting an exit could hand him control.

The Spanish grocer may feel down, but it is going to have to attempt to come up an alternative plan that could deliver more value and potentially force a sweetener from Fridman. The shares, hovering at 4 percent above the offer price, suggest investors are optimistic he might raise. DIA should try a defense. But make no mistake: the billionaire has the upper hand here.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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