EUR 250.00 For Business Accounts Only

DIA: L1's bid looks good but no need to rush

We see Letterone’s Eur0.67/sh buyout offer for Dia as good news for its minority shareholders as it provides them with an exit option at a 19% premium to the 3m avg share price. L1 wants to “relentlessly” focus on LfL growth in order to address what we historically described as Dia’s “original sin” of low sales densities which, coupled with strict cost control, should ultimately allow margins and returns to recover. The plan sounds sensible but we note once again that Dia starts in a very weak competitive position both in Spain and Portugal and while the upfront investment in terms of GM, opex and capex is something that L1 can control, the impact on LfL growth and LT profitability is also dependent on the way its main competitors react. Given Dia’s very low sales densities and high financial leverage, any small change in key assumptions may have a big impact on valuation. For instance a 50bp change to our 5.2% LT EBITDA mg in Iberia would impact our FV by Eur1.0/sh, all else being equal. The risks to the turnaround seem very high and, with the information we have so far, we think the offer looks attractive. Having said that, investors have some time to make a final decision and we think it makes sense to wait for the additional details that L1 has promised to disclose in the prospectus of the offer as well as for the strategic plan from Dia’s management. Hopefully Investors will be able to better decide whether they can afford the short-term pain and wait for the potential long-term gain. In this note we present a long due revision of our estimates and valuation to incorporate Oct’s profit warning and Dec’s asset impairments. Our SOTP valuation drops from Eur2.0 to Eur0.56 on lower input from Iberia and much higher debt but we set our FV at L1’s Eur0.67 bid as we see this as a sound backstop. Our rating stays at Neutral as, although at this stage the best option seems to be to take the offer, we think investors can wait a bit longer to take their final decision.