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DIA: Should I stay or should I go?

Letterone (L1) has raised its direct stake in Dia from 3% to 15% and it has also entered into a collateralised fwd deal to buy 10% more, effectively raising its interest from 10% to 25%. We expect the shares to go up on the news as it becomes almost certain that L1 will take a leading role in Dia’s strategic direction and, even though L1 said that as of now it does not intend to launch a full takeover bid, the probability of such an event does seem to have increased. Having said that, after extensive reflexion, we reiterate our SB SELL rating with a Eur3.5 FV. Firstly, we already expected that sooner or later L1 would become much more involved in Dia’s management and thus nothing has really changed on this front. Secondly, we still attribute a low probability of a takeover bid above the current share price and therefore think it is riskier to buy DIA to try to leverage on L1’s growing involvement than to stay short to play the inevitable margin erosion in Iberia. We would also expect a more muted impact from short covering than in July as the short base has dropped from 24.5% to 16.2% and it should be more resilient as the top six shorts (combined stake of 10.6%) have held steady in the aftermath of the first announcement in July.