07 March 2019

L1 Retail responds to Dia board's misleading presentation

Madrid, 5 March 2019: L1 Retail, an international investment business with proven world-class retailing and retail transformation expertise, and owner of 29% of Distribuidora Internacional de Alimentación S.A. (“DIA” or the “Company”), the Spanish food retailer, notes a presentation “Review of LetterOne’s recapitalisation plan” that the Board of DIA has published. L1 Retail believes the presentation is misleading and attempts to cast doubts on the viability of the comprehensive rescue plan that L1 Retail has proposed for DIA.

 

1. DIA has not provided evidence that its proposal is a viable solution

There are significant questions on the viability of the DIA Board’s plan that have not been highlighted to shareholders. DIA has not provided any detail as to how it would intend to implement any capital increase authorisation it might receive. On 27 February 2019, L1 Retail requested details of the underwriting commitments the Board has received from Morgan Stanley. L1 Retail is awaiting a response from the Company and believes it is misleading for the DIA Board to claim that its proposal has a “lack of conditionality”. Absent an unconditional underwriting commitment, DIA’s proposed capital increase has significant execution uncertainty for shareholders.

Furthermore, L1 Retail believes it is irresponsible for the Board of DIA to threaten to file for dissolution / insolvency if the L1 Retail proposal is supported by shareholders.

 

2. L1 Retail has provided a comprehensive plan that addresses the short and long-term needs of the Company

L1 Retail’s VTO, which needs to be authorised by the CNMV, provides certainty to shareholders of receiving €0.67 per share, a 56.1% premium to the closing price of 4 February 2019, subject only to three conditions: (i) European anti-trust approval, (ii) no new equity capital being issued prior to the VTO closing and (iii) acceptance by shareholders holding 35.5% of the share capital. The company’s solvency is not a condition to the VTO.

In addition, L1 Retail has provided a commitment to underwrite a capital increase of €500m upon successful completion of the VTO, subject to reaching an agreement with the Company’s lenders. L1 Retail has the funds available to fulfil this commitment.

 

3. Reaching an agreement with the Company’s lenders is not a condition to the L1 Retail VTO

Reaching an agreement with the Company’s lenders is not a condition to the VTO. Nonetheless, L1 Retail has made a constructive, balanced and fair proposal to the Company’s lenders. As part of this, L1 Retail has asked that DIA’s lending banks maintain their existing debt commitments and re-instate additional confirming/factoring lines (on a committed basis) until March 2023. L1 Retail has not asked for reduction in the principal of the financial debt held by the lending banks.

 

4. L1 Retail’s proposal is significantly more shareholder friendly

The L1 Retail VTO offers shareholders the opportunity to sell their shares at a significant premium of 56.1% to the closing price of 4 February 2019. This compares to the DIA Board’s capital increase whereby shareholders, to avoid dilution, would need to commit new cash capital in an amount that is significantly higher than the current market value of their investment in support of a plan proposed by the DIA Board that involves no changes in governance.

Even after investing additional cash, shareholders’ prospects are still subject to significant uncertainty, given DIA’s continued governance and leadership challenges, the challenging nature of an extended time period required to execute the turnaround plan, and the limited funds that flow to the Company under the Board’s proposal.

 

5. L1 Retail’s turnaround plan differs significantly from the Company’s plan

L1 Retail has a comprehensive plan which has been developed by its experienced team of food retail executives. The execution of the plan requires leadership and governance, which L1 Retail would provide to the Company over the next 5 years as well as a real sense of urgency to implement change. L1 Retail believes that significant investment is required to return the company to sustainable long-term revenue growth. Given the scale of the transformation required, L1 Retail believes that a sustainable recovery is likely to take at least four to five years to occur.

For further information, including new Investor Presentation and Q&A please visit: www.makediaachampion.com

Ends


Enquiries

For further information, please contact:

 

Spanish media:

Aida Prados

+34 636 424 483

aprados@estudiodecomunicacion.com

 

Juan Frances

+34 679 962 382

jafrances@estudiodecomunicacion.com

 

Shareholder Engagement and Corporate Governance advisers:

Boudicca

+44 (0) 203 475 5158 (UK) / +34 9112 38259 (Spain)

L1Retail@boudiccaproxy.com

 

International media:

Stuart Bruseth

LetterOne

+44 203 815 3385

sbruseth@letterone.com

 

Billy Clegg / Jennifer Renwick / Nick Hennis

Camarco

L1Retail@camarco.co.uk

+44 203 757 4983 / +44 203 757 4994

 

QUESTIONS & ANSWERS

Voluntary Tender Offer (“VTO”)

Q: Is the VTO a binding offer?

A: Yes, as of 5-Feb-2019, L1 Retail has made a binding offer to acquire all of the shares of Distribuidora Internacional de Alimentación, S.A. (“DIA” or the “Company”) at €0.67 per share, subject to three conditions. Like all tender offers, the VTO is subject to authorisation by the CNMV.

 

Q: What are the conditions to the VTO?

A: There are three conditions to the VTO: (i) anti-trust approval; (ii) no equity capital being issued prior to the CNMV publishing the result of the VTO; and (iii) acceptance by shareholders holding 35.5% of the share capital. The VTO, like all tender offers, is also subject to the authorisation of the CNMV.

 

Q: What is the anti-trust condition?

A: Brazilian anti-trust approval has been received. The EU approval process has commenced, and we expect to receive a decision shortly.

 

Q: Why is there a condition for no new capital increase prior to the VTO closing?

A: L1 Retail is unwilling to invest any new capital into the company before governance changes have occurred. L1 Retail has provided a commitment to support a capital increase of €500m upon completion of the VTO.

 

Q: Why did L1 Retail make a VTO rather than a mandatory tender offer (“MTO”)?

A: Under Spanish law, L1 Retail is not required to make an MTO as it currently has a shareholding of less than 30% of DIA. In the event that L1 Retail were to be in a scenario where an MTO were required by law, the minimum price that L1 Retail would have had to pay in an MTO would be the highest price that L1 Retail had purchased shares at in the preceding 12 months. This price does not reflect the accounting issues were discovered in October 2018 that led to the significant market capitalisation destruction.

 

Q: Why is the acceptance condition 35.5% of the share capital?

A: As a matter of Spanish law, L1 Retail must receive the acceptance of 50% of non-L1 shareholdings in the tender offer for it to remain voluntary, and not require an MTO.

 

Q: Is the solvency of the company a condition of the VTO?

A: No, the company’s solvency is not a condition of the VTO.

 

Q: Is reaching an agreement with DIA’s lending banks a condition of the VTO?

A: No, an agreement with the banks is not a condition of the VTO but a condition to the L1 Retail €500m capital increase.

 

Q: Is L1 Retail confident that its VTO will be successful?

A: L1 Retail has provided an attractive alternative to shareholders who wish to accept a significant cash premium over having to invest significant new capital to repay the Company’s indebtedness. L1 Retail is confident that it will receive the support of shareholders who tender into the VTO.

 

Q: What happens if the DIA €600m capital increase takes place?

A: L1 Retail will not support or subscribe to the Board’s capital increase. If the DIA €600M capital increase nevertheless proceeds, L1 Retail’s VTO would withdraw the VTO as it is a condition of the L1 Retail VTO that no capital increase takes place prior to the VTO closing.

 

Q: How could investors compare a DIA €600m capital increase to a VTO alternative?

A: If DIA’s €600m capital increase proceeds, to avoid dilution, shareholders would need to commit new cash capital in an amount that is likely to be significantly higher than the current market value of their investment. If they do not invest, their shareholding may be significantly diluted by the DIA capital increase. If shareholders do not wish to invest additional capital, they will be able to sell their shares and rights. L1 Retail believes that there is a real risk the value of such shares and rights will be significantly less than the value offered to shareholders under the VTO.

 

Q: What governance structure would be in place after the completion of the L1 Retail VTO?

A: A new board of directors will be put in place by L1 Retail upon successful conclusion of the VTO would take into account the presence and representation of minority shareholders

 

Q: Why has L1 Retail put forward a VTO?

A: As the shareholder that has suffered the greatest loss, L1 Retail could have abandoned the Company. However, as a long-term investor, L1 Retail believes it is possible to transform the company over 5 years subject to having the right leadership and governance and a viable capital structure.

 

L1 Retail €500m Capital Increase

Q: What are the conditions to the committed €500m capital increase?

A: L1 Retail is committed to underwrite a capital increase of €500m, following the completion of
the VTO and appointment by L1 Retail of a majority of the Board of Directors of the Company. The L1 Retail capital increase would be only conditional upon on reaching an agreement with DIA’s lending banks regarding a viable, long-term capital structure for DIA.

 

Q: What happens if L1 Retail cannot reach agreement with DIA’s lending banks?

A: The VTO is not conditional upon reaching agreement with DIA’s lending banks. If L1 Retail is unable to reach an agreement with DIA’s lending banks then it will not proceed with the proposed €500m capital increase.

 

Q: Would L1 Retail be willing to inject €500m into the company immediately following the completion of the VTO?

A: Yes, subject to reaching an agreement with DIA’s lending banks, L1 Retail is open to deploying funds immediately in form of a subordinated loan if needed. Such a subordinated loan would be repaid through the €500m capital increase.

 

Q: What will your capital increase be priced at?

A: L1 Retail is committed to a capital raise at a minimum of €0.10, as compared to the Company who are seeking to reduce the nominal value of the shares to €0.01.


L1 Retail’s Proposal to DIA’s Lending Banks

Q: Has L1 Retail engaged with DIA’s lending banks?

A: Yes. L1 Retail has made a constructive, balanced and fair proposal to the Company’s lenders.

 

Q: Has L1 Retail demanded ‘haircuts’ from DIA’s lending banks or bondholders?

A: No. L1 Retail has never asked for reduction in the principal of the financial debt held by the lending banks or bondholders.

 

Q: What is the likelihood of reaching an agreement with DIA’s lending banks?

A: L1 Retail has made a constructive, balanced and fair proposal to the Company’s lenders and is confident that it can reach an agreement with them to deliver a viable long-term capital structure prior to the maturity of the Company’s 2019 bonds in July.

 

Q: What has L1 Retail proposed to DIA’s lending banks?

A: L1 Retail has made a constructive, balanced and fair proposal to the Company’s lenders. The key elements of the proposal are that DIA’s lending banks have been asked to (i) maintain their existing debt commitments and re-instate additional confirming/factoring lines (on a committed basis) until March 2023; (ii) provide covenant relief in favour of the Company; (iii) provide for fees and rates on agreed terms no worse than other facilities for the Company or other companies with comparable leverage. L1 Retail has not asked for reduction in the principal of the financial debt held by the lending banks.

 

Q: Does L1 Retail’s proposal include repayment of bank facilities?

A: No. L1 Retail believes it is critical for new capital to be invested in transforming the Company and does not envisage repayment of lending bank facilities. This is in stark contrast to the approximately €147m bank repayment envisaged by DIA’s Board paid for by the proposed €600m capital increase and a further €100m repayment from the disposal of non-core assets.

 

Q: What are the differences between L1 Retail’s proposal to DIA’s lending banks and the agreement that DIA has reached with its lending banks?

A: There is a lack of clarity as to what DIA has agreed with its banks. Based on our understanding, there are two primary differences between the proposals: (i) L1 Retail has asked for the banks to maintain their existing debt commitments as compared to the Company repaying €147m of senior facilities; and (ii) L1 Retail has asked the banks to re-instate additional confirming/factoring lines (on a committed basis) to ensure the Company has sufficient liquidity during the 5-year transformation plan.

 

L1 Retail’s Proposals to DIA’s Bondholders

Q: Has L1 Retail engaged with DIA’s bondholders?

A:No, at this stage L1 Retail has only engaged with the Company’s lending banks.

 

Q: How does L1 Retail intend to deal with the 2019 Bonds?

A: L1 Retail has made a constructive, balanced and fair proposal to the Company’s lending banks, which envisages the repayment or refinancing of the Company’s 2019 bonds prior to their maturity in July.

 

Q: How does L1 Retail intend to deal with the 2021 and 2023 Bonds?

A: L1 Retail is seeking to agree a long-term viable and stable capital structure with DIA’s lending banks. There is no current intention to make any changes to the 2021 and 2023 Bonds.

 

Negative Equity

Q: Why have you not addressed the negative equity and are you not putting the company into insolvency?

A: Negative equity is an accounting issue not a cash or liquidity issue, and there should be no need for the company to file for insolvency. L1 Retail has engaged legal and accounting advisors who have developed alternative solutions for the Company. These have been provided to the Board, together with a legal opinion.

 

Q: Why will you not provide a solution by providing a loan?

A: L1 Retail has suffered losses of almost €700m caused by leadership and governance failures. There is a need for governance changes to occur before L1 Retail is willing to invest any new capital to the company.

 

Q: Is L1 Retail seeking to force the company into insolvency?

A: No. As the largest shareholder, L1 Retail would not want the business to file for insolvency due to an accounting issue. L1 Retail has provided potential accounting solutions to the Company. L1 Retail is also willing to move as quickly as practicable to complete its VTO and to inject €500m into the company.

 

L1 Retail Turnaround Plan

Q: What is the difference between the L1 Retail turnaround plan and that of the Board?

A: L1 Retail has a comprehensive plan which has been developed by its experienced team of food retail executives. The execution of the plan requires leadership and governance which L1 Retail would provide to the Company over the next 5 years.

 

Q: Do you share the same view as the Board that the Company can expect a recovery in 2020?

A: No. We believe that the turnaround plan will take up to 5 years to complete. L1 Retail believes that significant investment is required to return the company to sustainable long-term revenue growth. Given the scale of the transformation needs required, L1 Retail believes that the inflection point of recovery is likely to take at least 4-5 years to occur.

 

Q: When will we receive more detail on your turnaround plan?

A: We will share more detailed plans in the Prospectus which will be published upon authorisation of the offer by the CNMV