Spanish owners allocate funds to clean balance sheet; group filed for reorganization

06/03/2024

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DIA’s local operation has been in court-supervised reorganization since March — Foto: Claudio Belli/Valor

The sale of the supermarket chain DIA’s operations in Brazil to Lyra II Fundo de Investimento em Participações (FIP) accelerated a month ago as the Spanish owners needed to clean the balance sheet and reduce the Brazil risk in its financial statements. Banco Master’s MAM Asset structured the fund but is not involved in the deal. Valor found that a group of former executives of Alvarez & Marsal are leading the fund.

DIA’s local operation has been in court-supervised reorganization since March and is expected to be acquired by the fund for a symbolic amount (€100). In practice, the group paid to operate in Brazil in recent years and divest the country’s chain.

Valor found that, despite the progress of the company’s operational recovery plan, the more financial approach by Chairman Benjamin Babcock gained strength over the last few weeks. Mr. Babcock leads the investment firm LetterOne, with 77% of the group’s shares.

According to this approach, the chain requires a faster solution in Brazil, involving negotiation with foreign banks to refinance the retailer’s debt in Spain.

The completion of the sale hinges on DIA obtaining the banks’ approval of the terms of the agreement, which includes a final capital injection into the local operation. “LetterOne was unwilling to inject capital and needed to reduce leverage. Therefore, divesting of the Brazilian operation became the top priority,” a person familiar with the matter said. Two proposals were at the table, one by Lyra II FIP and another by DIA Brasil managers. The first was the winner.

A statement by the headquarters informs that under the agreement with the fund, DIA will allocate €39 million (R$222 million) to the company in Brazil and will pay €30 million in guaranteed debt (R$171 million) with Santander. It should spend €5 million (R$28.5 million) on transaction expenses, for a total allocation of R$422 million.

As an accounting effect, with no cash disbursement, there are €27 million (R$154 million) in exchange rate adjustments. In total, considering cash and accounting effects, the impact is R$575 million.

Over the last decade, between €500 million and €1 billion have likely been injected into the subsidiary, according to another person, including the period when an accounting fraud was unveiled, in 2019.

The announcement of the deal with the fund, on Friday (31), occurred hours before the company’s reorganization plan was filed in court, with legal debts of R$1.1 billion, as revealed by Valor.

The fund’s investors, through the management, are expected to open negotiations with creditors based on the filed plan, according to two industry creditors’ lawyers interviewed by Valor.

“There is a plan to resume DIA’s operations, that’s what we’ve heard, and we think it’s still in effect. This is the signal we want to see from the new owners,” says one of the lawyers, who criticized the headquarters’ lack of transparency in disclosing information about the fund. Information regarding the Lyra II FIP appears only in a statement to the Spanish market regulatory body.

The fund, structured by MAM Asset, was registered with the Board of Trade on May 17, specifically for the deal. In recent days, there were rumors in the market that Brazilian investor Nelson Tanure could be leading the agreement, given his operations through MAM. Valor found that Mr. Tanure was not involved in the deal.

Santander is the main creditor bank, with two loan facilities (R$85 million and R$90.9 million). Banco do Brasil has loans amounting to R$27.3 million and Daycoval, has R$16.5 million. Most of the debt is with suppliers.

By exiting Brazil, the controlling shareholders of the DIA group will have operations only in Spain (90% of revenue) and Argentina. The decision surprised the market and the group’s leadership in Brazil, which was leading the retailer’s turnaround, and had closed a restructuring project with the headquarters in March.

Led by Sébastien Durchon, the chain has improved its performance—cash consumption decreased and losses were reduced by almost two-thirds, Valor found. Of the total stores, 343 closed between March and April. The group currently has 244 stores (121 owned and 123 franchises) in addition to the distribution center located in Osasco, in São Paulo.

According to the plan filed on Friday (31), which may change after negotiations, creditors that accept to cooperate will not have any discount on their debt but cannot litigate against the company. They also should maintain supply according to the best commercial conditions in effect over the 150 days before the filing of the reorganization plan.

In the first two years after approval, the payment period to cooperating creditors will be at least 30 days or whatever was in effect before the filing (whichever is longer). DIA commits to pay cooperating creditors in 96 monthly installments, following the end of a two-year grace period.

There are also payment conditions for creditors with unsecured debt, labor creditors, and small and micro companies. Under the plan, DIA commits to maintaining its activities and could divest from assets to pay debts amounting to R$1.1 billion.

Considering its facilities, machines, furniture, and utensils, the group’s residual balance is R$88.1 million, according to the feasibility study report attached to the plan. The residual balance of all fixed assets amounts to R$413 million.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/