Russian billionaire rues the day he bought it. “We should have been more cautious and done our due diligence better.”
By Nick Corbishley, for WOLF STREET:
Dia, once one of Europe’s largest supermarket chains but now struggling with cascading losses and a near-bankruptcy experience, has just disclosed its results for the first three quarters of 2019. The firm racked up even more losses (€504 million) in the first nine months of this year than it did in the whole of last year (€365 million), when it was rocked by accusations that its executives, with the complicity of its auditor, KPMG, had engaged in accounting fraud to conceal the true extent of the firm’s losses.
Luxembourg-based investment fund LetterOne (L1) took over the supermarket group in the summer with the purchase of 70% of the group’s shares. L1 is owned by Russian billionaire corporate raider Mikhail Fridman who had made his fortune in oil, retail and banking during Russia’s chaotic transition to a free market economy in the 1990s and who was listed by Forbes this year as London’s richest resident.
In the first nine months of this year the supermarket chain’s EBITDA (earnings before interest, tax, depreciation and amortization) plunged 80% from a year ago, to €48.3 million. Sales dropped 7.4% to €5.1 billion and its total net debt soared by €1.1 billion, from €1.5 billion at the end of 2018, to to €2.6 billion in Q3 2019.
Dia’s main creditors include not only big Spanish lenders like Santander, BBVA, CaixaBank and Banco Sabadell and European heavyweights like Barclays, Société Générale, and Deutsche Bank, but also the ECB which as of last year held at least €200 million worth of Dia’s bonds, although it may have since sold them at a multi-million euro loss.
Another €500 million is owed to L1, which is in the process of carrying out a €605 million rights issue for Dia, which will further dilute shareholders who didn’t sell out to L1 in the June takeover. Since then, the value of Dia’s shares have plunged 75% to €0.17. Two years ago, they were worth close to €4.
If the capital expansion is successful, L1 will be able to repay itself €500 million of the €1.37 billion it paid to take the company over, and Dia’s net debt will subside to a slightly less daunting €2 billion. Thanks to a debt extension agreement struck with Dia’s main creditors, L1 has been able to put off paying back Dia’s huge debt load. The first bond repayment, for €95 million, now won’t be payable until September 2020. That will be followed by a repayment of €300 million in April 2021. But the vast bulk of the debt won’t have to be paid back until Spring 2023, when €984 million will come due.
To accomplish all this, Dia needs to attract enough interest from outside investors to complete this month’s rights issue, otherwise all bets are off. It then needs to deliver a viable long-term business plan to its creditors by the end of this year. As part of that plan, it will need to convince creditors that there’s at least some possibility of returning to profit before its bond repayments begin to kick in.
Turning a profit is something Dia has struggled to do for quite some time. Huge doubts remain about the viability of its hard-discount business model in an already overcrowded market. It still faces intensifying competition, including from online retailers. This is particularly true of its domestic Spanish market where the supermarket giant Mercadona now controls almost a quarter of the entire grocery market after years of ruthless cost cutting, while the German discount chains Lidl and Aldi are rapidly wresting market share from domestic low-cost retailers like Dia.
In Spain net sales have fallen 7.8% so far this year, “hit by lack of stocks, negative coverage in the media, negative perception in society at large, and the sharp decline in marketing investment,” the company said. In Portugal, net sales fell by 7.5%, while in Argentina they slumped 45.5% to €984.7 million, due partly to the collapse of the Argentina peso. In Brazil net sales dropped by 17.6%, to €999.7 million euros.
Even Dia’s new owner, Fridman, has begun to express reservations. In a recent interview with El Pais, he said he could not have imagined the sort of problems that would come up in the company.
“We made mistakes,” he said. “We should have been more cautious and done our due diligence better. That was our mistake and we’re paying for it… The fact is we have lost a lot of money.”
Now, Fridman is facing trial in Spain on charges of artificially depressing the value of Spanish digital entertainment firm Zed Worldwide in order to take it over after the company declared bankruptcy. Lead prosecutor Jose Grinda said the technique involved using legal and financial means to economically “strangle the company until it goes bankrupt.” Those means allegedly included getting Russian telecoms firm Vimpelcom, which is also controlled by Fridman, to abruptly cancel its contracts with one of Zed Worldwide’s Russian subsidiaries, depriving the Spanish firm of significant revenues.
Fridman also faces allegations in a separate trial of conspiring in a “criminal corporate network”, that included Goldman Sachs, to trigger the collapse of Dia’s shares so that L1 could pick up the supermarket chain on the cheap. Fridman bought his first packet of Dia shares in 2017, at €5.10 a share. At that time, the company had a total market cap of €3.7 billion, almost €2.4 billion more than the amount Fridman paid to buy it outright two years later.
Fridman denies the charges. “I am the biggest victim of the collapse of Dia’s shares,” he told El Pais. “We have invested €1.6 billion in the company. When we came in we thought, ‘this is a listed company. As such, its level of transparency and the quality of information should be very high.’ It was only later that we discovered that its accounts were a sham.”
Whatever the outcome of the two trials may be, what is clear is that for Dia, its new management, employees and new owners, they represent an unwelcome distraction from the day-to-day business of just trying to keep the company alive. By Nick Corbishley, for WOLF STREET.
In funds with a liquidity mismatch, the First-Mover Advantage is huge, as Woodford’s investors found out. Read… Redemptions Rip Through UK Equity Funds as Fallout from Woodford Collapse Grows
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Hey, if he’s looking for another opportunity, I bet Elon Musk would consider selling TSLA!
Attention all oligarchs. My company makes a profit every year and has done for a decade. No debt, money in the bank. You can buy it off me for £100 million. You might think the P/E is a bit tasty (roughly 100) but hey, look how much you’ll save buying something that actually makes money rather than burning it. Call me. You know it makes sense.
“P/E is a bit tasty (roughly 100)”
Actually, zero – or better yet negative – earnings is better because that way the PE is infinite….like a huge chunk of the Russell 2000…
Profits are a liability.
If earnings are negative, P/E will always be negative. Only at zero it becomes “undefined”, not “infinite”.
The Russian oligarchs are buying up assets like the Japanese in the 80’s… Including US politicians!! It will not end well…
Ironic, since it was the US politicians and think tanks of the day that created Russian Oligarchs. They told Russia that the thing to do was to have ‘shock therapy’ to switch from communism to capitalism. This put up huge amounts of assets available for pennies on the dollar to those who could bribe their way into the deal. And thus the Russian Oligarchs with control of resources they could make money from were created. This of course also had the usual effects of US economic advice like cutting life expectancy.
All the former communist state did that, except Belarus. Guess which one grew the most since 1991?
We used to shop at Dia here in Turkey until they existed the Turkish market There are many better Turkish brands available to be honest We shop at farmers markets as much as possible and I grow some of our own food
A well run supermarkets has around a 5% ROS.
Lots of inventory, highly competitive marketplace and low returns.
Supermarkets don’t have a lot of inventory compared to sales, highly competitive is not 2 (Aus) or 4 (UK and France) and returns are low on sales but they are for retail reliable. Loosing 7.5% of gross is unbelievable bad for a supermarket (i assume without store closing) but is the normal up and down in most retail business
They are also a great way to increase sales of your own consumer goods. Important if you control managment
Yes, without strict overseen perishable operations you can lose your “azzzz” in that business! Inventory control and loss thru theft and or deterioration can kill you.
Spent my last 30 years of my working career in the business.
What! KPMG is corrupt? Who would have thought? Actually what I’m surprised at is Fridman’s naivety at thinking the books wouldn’t be cooked.
Nice piece Nick. Methinks this story is not yet done. Dia is an OK shopping experience, but one should realise it is a discounter not Upmarket. Too much Spanish bank exposure – probably L1’s collateral damage? On other hand, debt repayments only start in 2020/21 by which time consumer demand will be strong. Will probably take it private.
Russian billionaire. ‘Nuff said
This is like trusting Chinese data. It’s all criminal activity and useless in doing any analysis.
Similar thing is happening in the UK supermarket wars. The German discounters, Aldi and Lidl, are piling in and (massively) slashing prices and grabbing marketshare from domestic brands, like Morrisons and Sainsbury’s, causing them great pain.
Aldi and Lidl are good news for UK consumers, because it cuts your food bill by 20-80%. But bad news for the incumbent supermarkets, who can’t compete with the scale and opaque tax structures.
The German food retail market has been the toughest in the world for decades with avg. profit margins of 2% and the hard discounters Aldi/Lidl curiously being the most profitable. The German shopper goes to lengths to find the lowest price while accepting nothing less than good quality. Walmart had tried and failed to enter, leaving tail between their legs.
Aldi/Lidl have e.g. pioneered the concept of encouraging customers to return every faulty glass of jam, in turn charging suppliers stiff penalties which has led to extremely consistent quality even for low-margin items. They are VERY tough yet also fair and reliable buyers offering serious volume.
The UK has had a tiered supermarket landscape closely corresponding to its rigid caste-like social classes, with little competition between the strata. Below premium level, consumers historically were more forgiving towards lower quality while not giving prime attention to grocery shopping costs.
The economic downturn in the UK that started 2008 and is ongoing has compressed household budgets and has the opening for the German discounters, outclassing the incumbents and arguably providing a great service to the shopping public.
It seems like finally the mindless race to the bottom among European supermarket chains is finally starting to bite.
France’s Group Casino entered bankruptcy protection in May and is likely to stay there until it’s effectively dismantled to pay off debts. The court-appointed administrators expected to get about €2 billion to pay creditors in August, but it’s becoming clear Casino is not worth that much money, at least not in a completely saturated european market. Somebody is going to eat a whole lot of losses, starting from all those French funds focusing on high yield “investments” promising 7-8% coupons for the first year.
Auchan of France reported a whooping €1.2 billion losses in FY2018 (in France Fiscal Year coincides with Calendar Year so we’ll have to wait a couple months for more bad news) and is selling off assets to stay afloat, starting from their Italian operations, not a bad idea given how saturated the Italian market is, but it’s most likely too little too late.
Restructuring retailers is always extremely problematic: Italy’s Mercatone Uno spent three years in bankruptcy protection until it was sold off last year to a shady Malta-registered company. Ten months later it was finally declared bankrupt and shut down after losing a veritable mind-boggling €60 million (€200,000/day of operation) on top of the €30 million liabilities the new owners had agreed to take on. You cannot make this stuff up.
To get back to Dia, since the L1 takeover was announced I’ve had the suspicion Fridman was trying to buy his way out of his judicial troubles in Spain by effectively avoiding large layoffs (or the threat of) in an extremely fragile political environment where early elections are always a possibility. Fridman may be a shady character but he’s no fool: he knows how to deal with politicians, otherwise he wouldn’t have prospered during the fall of the USSR.
Until L1 controls Dia the Spanish government has to thread extremely carefully: any false move and Dia starts “restructuring”, meaning laying people off.
Spanish politicians have delusions of grandeur and think they are the second coming of the Duke of Lerma and Count-Duke of Olivares all rolled into one. They aren’t worthy to lace either great valido’s riding boots.
But like them they will end up being undone by their own arrogance and by overextending an already exhausted and divided realm.
‘The Englishman grumbles when he wakes, and after a day of work is satisfied to count up his solid earnings.
The Latin wakes with dreams of his own greatness and glory, and goes to his cold bed, disillusioned and broke.’
Madame de Stael
Wiggly Piggly, the European types of food chains bites the earth! I see way too much financial engineering that it hurts main stay retailers! LBO, whatnots!
Average middle class person in a shrinking American world is changing right before our eyes!
Ok, Russian dude, you’re business model needs a couple tweaks:
1) You seem to think you’re in the GROCERY business (no self-respecting oligarch wants to be in the GROCERY business?); you really ned to be in the UNICORN business
2) Change the name to Dia Technology, Inc.
3) Figure out a way to sell bananas and stuff like that on the blockchain (even if you just lie & say it’s on the blockchain)
4) You currently have a company that literally loses millions of euros every day the front doors are open; THIS IS EXACTLY THE TYPE OPPORTUNITY SOFTBANK HAS BEEN LOOKING FOR! Get together with Masa Son; the problem could be as simple as you’re not losing money fast enough.
5) Use the Saudi Arabian approach: tell people you will kill them if they don’t shop at your store
QOTD. Javert Chip, you have been declared the winner of the Internet. Golf clap.
And these are good old days!
What idiotic bank executive is allowing L1 to pay itself first with any proceeds of its equity offering, while delaying the banks’ debts for another year?
This is the classic private equity playbook, and the only thing that year of time is buying Dia is the ability for L1 to strip its carcass clean before leaving the remains for the jackals (i.e. the banks) to squabble over.
The banks even have leverage here: if they call their debts, the whole thing goes kaput and L1 loses its entire investment, along with whatever debt is still owed that will need to be paid out of its other holdings. I can’t imagine what kind of corrupt banker would allow L1 to pay itself back for its own takeover effort, over the claims of longtime bondholders. Worse, it lowers the incentive L1 has to actually fix the company rather than just walk away with whatever short term asset stripping it can pull off. I guess a weekend in Ibiza with hookers and blow (or since it’s a Russian host, maybe trafficked Slavic “models” in Moscow?) is enough to get a banker to sign away his shareholder’s loan assets to a private equity shyster…
Great article and many entertaining comments. Have to have something to laugh about with these insane deals.
There seems to be a restructuring in the worldwide supermarket industry. Here in China, Wal-Mart is closing stores. Carrefour is closing stores. Metro Cash and Carry (German equivalent of Sam’s Club or Costco) is rumored to be closing stores. Vanguard (subsidiary of Tesco in the UK) is reorganizing. Here Lotus (in Thailand Tesco-Lotus is the big supermarket chain) is selling off stores to Chinese investor groups. Prices are getting lower and lower. It might be a race to the bottom, however.
I don’t know exactly how Metro C&C is positioned in China, but in Europe is a wholesaler selling to businesses, restaurants and the like.
Their business has been stagnating for years: Metro AG, the holding company, had revenues of €30.5 billion in FY2014 and of €29.4 billion in FY2018. While hardly a catastrophe it signals Metro’s once unstoppable business model has reached its limits and is being pushed back. How long before they’ll open the doors to ordinary retail business to increase revenues (and kill whatever profits remain for good) remains to be seen.
Carrefour closed FY2018 with a loss of €344 million. Nowhere near as bad as Auchan but as Casino proved the situation can get out of hand faster than anybody likes.
Carrefour is in many ways a symbol of modern Corporate France, with deep ties to a government which struggles to reconcile its pathological obsession for big nominal GDP growth figures to flash around and the need to keep inflation and unemployment in check, or pretend to do so to avoid an already serious social situation to become downright explosive.
To have a mini spy drone disguised as a fly during those high level meetings in Paris…
Nor is France unique in this.
All states are locked into the international GDP ‘growth’ boasting game, when, as we know, the growth model is more or less now dead in the water after a run of some 250 years or so. The evidence is all around us.
The IMF, as a counsel of desperation, now asks for fiscal stimulus to restore growth, as monetary measures have been exhausted, and only gave us an illusion anyway: those too must, logically, fail.
An illusory ‘growth’ may still, it is true, be obtained by fantasy borrowing; but at a very poor return on the debt. Various calculations of ‘clean GDP’ are very enlightening, for instance those made by economist Dr Tim Morgan.
For all the fashionable talk of ‘De-Growth’, what government can officially announce that the reality behind this cosy phrase has arrived, and that – in plain language – the age of regression and descent has dawned, if not quite yet the age of collapse?
‘Bananaland is now a De-Growth economy,’ is a sure-fire consumer confidence and investment killer. Everyone at the table is lying about their hand…..they must.
Moreover, it opens the door to political discussions about the systematic re-distribution of declining wealth – a discussion that no-one who is still solvent wishes to have, not just the top 10%.
The mall part of the hypermarket has the same troubles as all other mall retailers. That is one reason. Other is to many. And there is always new competitors and to much cost
Because online shopping in China is already so advanced to the point these foreign hypermarket chains can’t compete.
How do we know that they did not purchase to asset strip & tax minimise their overall wealth ??
Money is the root of all bullshit – right.
I suggest that a business that is at least breaking even is not going to go bust.
And everyone need to eat … so
Everyone stopped eating all of a sudden ??
It just slipped through our fingers is the notion that they want us to believe here.
I suggest that we are way too smart to succumb to their will.
I think you are fantastic Wolf Richter & a definite necessity to the global financial scheme of things.
Where Is Don Quijones ??
Don Q. has dropped his secret identity and is now writing under his real name.