What's Next for the Worst Spanish Stock of the Year

(Bloomberg) -- After skidding 90 percent this year, DIA is on track to be the worst-performing Spanish stock in 2018. Shareholders have watched 2.4 billion euros ($2.7 billion) be wiped out, leaving the troubled retailer with a market value of 280 million euros, the lowest since its initial public offering back in 2011.

A combination of fierce competition at home and economic turmoil in South American markets have pressured Distribuidora Internacional de Alimentacion SA’s business, adding to uncertainties around its future. So far this year, DIA has issued a profit warning and replaced its top management as the groundwork was laid for its ouster from Spain’s benchmark Ibex 35 stock index later this month. So, what’s next for the company?

New Management

DIA is still looking for a new chairman, after having two different people at the helm this year. When longtime insider Ana Maria Llopis resigned in October the company later named Stephan DuCharme as acting chairman. He was nominated by LetterOne, a major shareholder with 29 percent.

He resigned earlier in December and DIA said it would focus on a new plan allowing the company “to achieve its commercial, financial and strategic objectives.” Two board members nominated by LetterOne also resigned on Tuesday to focus on a “potential long-term sustainable plan.”

Shares fell as much as 16 percent and were down 10.5 percent at 0.40 euros at 2:41 p.m. in Madrid.

Chief Executive Officer Antonio Coto, appointed in August, is working on a strategy that includes selling non-core businesses, refocusing the grocery arm in Iberia and reducing leverage. The plan is expected to be presented in January, with analysts waiting for specifics.

“We expect to get more details and numbers so there can be greater visibility on the current situation of the company and on its future,” said Renta 4 analyst Ana Gomez, who has placed DIA under review.

Debt refinancing

DIA’s management is in talks with its creditors to refinance debt and the company said last week it expects to complete the process “shortly.” DIA hired PwC to review its 1.4 billion euros of debt, while bank lenders have hired Linklaters as legal adviser, people familiar with the matter said last month.

DIA has bank loans and bonds, with the first loans coming due in February. The 300 million euros in bonds maturing in 2023 have dropped from 90 cents on the euro to 58 cents since the profit warning.

Capital Increase

The Spanish grocery retailer is mulling a capital increase and entered a stand-by underwriting deal with Morgan Stanley for 600 million euros, it said last week.

“The standby underwriting commitment of 600 million euros initially suggests existing shareholdings could be diluted by about 70%, though bankruptcy risk may fade,” Bloomberg Intelligence analysts Conroy Gaynor and Charles Allen said in a note last week.

A capital increase would allow the company to remove financial risk but won’t solve its problems, said Gonzalo Sanchez, a Spanish equities fund manager at Gesconsult in Madrid.

“The business is not going well and the company has many things to turn around as it has fallen behind its competitors,” Sanchez said. “We are in a wait-and-see mood with DIA as we would need more visibility on its future to look into its shares again.”

Possible Takeover bid

LetterOne, Russian billionaire Mikhail Fridman’s investment vehicle, has increased its stake in DIA this year and stands just bellow the threshold under which Spain obliges a full takeover bid, a possibility many investors are expecting. Under Spanish law, any shareholder with a 30 percent stake is required to make an offer for the remainder of the company.

The requirement has been waived in some instances. Two years ago, Spain’s regulator approved a request from Siemens Aktiengesellshaft to exempt it from making a takeover offer for a company formed by Spain’s Gamesa absorbing Siemens Wind Holco, after gaining control of more than 30 percent.

An offer from LetterOne for DIA could come anytime after January. Spanish law rules that no takeover offer can be valued lower than the highest price paid by the shareholder over the past 12 months. LetterOne increased its DIA stake in January 2018 to 25 percent, when the shares were trading above 4 euros, compared with a price below 50 euro cents a share now.

“We see a takeover bid as probable but not imminent as LetterOne already controls the company de facto,” Gomez said. “It could be during the second quarter of 2019.”

Earlier Tuesday, DIA said two board members appointed by LetterOne resigned in order to work on the design and development “of a potential long-term sustainable plan” on behalf of LetterOne.

--With assistance from Rodrigo Orihuela and Katie Linsell.

To contact the reporter on this story: Macarena Munoz in Madrid at mmunoz39@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, ;Celeste Perri at cperri@bloomberg.net, Monica Houston-Waesch, Charles Penty

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