Dia Buys El Arbol

Dia Buys El Arbol

Dia Buys El Arbol

Spain’s economy is returning to growth after a deep downturn and its M&A market is also gaining momentum. Companies across a variety of industries are seeking to increase market share to take advantage of the upturn.

A recent example is Spanish discount supermarket group Dia’s buy of grocery chain El Arbol for around 158 million euros, including El Arbol’s estimated net debt of 99 million. The move will consolidate Dia’s position as Spain’s third-largest retailer behind Mercadona and France-based Carrefour – formerly Dia’s parent company prior to its 2011 spin-off and 2012 Madrid stock exchange listing.

And the El Arbol deal went down well with investors, who applauded Dia’s decision to increase its scale in Spain at an attractive valuation. When the news broke on July 2, shares in Dia closed up 5.8 per cent at a record high of 7.08 euros each.

FOCUSING ON IBERIAN GROWTH

Dia is the world’s third-largest discount supermarket group, with 6,600 stores globally, including in Argentina and Brazil. Over the last five years, the Madrid-based retailer has focused on countries like Spain and Portugal where its discount format has thrived amid high unemployment, stagnant wages and tax hikes.

In 2012, it bought the Spanish and Portuguese arms of insolvent drugstore chain Schlecker to expand its presence in the Iberian Peninsula. But its business model has not been so successful in France – where discounters compete with cut-price hypermarkets – and it agreed to sell its French stores to Carrefour in June. It also disposed of its struggling business in Turkey in 2013 and has closed stores in China. But in Spain, where it had more than 4,200 shops at end-June, Dia has been on the hunt for distressed rivals to strengthen its presence for some time.

COST CONTAINMENT TO BEAT PRICE CUTS

So is Dia’s global restructuring to focus on the Iberian Peninsula, and Spain in particular, a smart move going forward?

Sales in Spain and Portugal – which together generate two-thirds of the total – fell 5.6 per cent in like-for-like terms in the second quarter amid aggressive price cutting and low inflation. But its gross margin remained stable as Dia cut operating expenses by nearly 15 per cent – a good basis for future sustainable growth, say analysts.

And El Arbol is a good investment fit for Dia. It is Spain’s eighth biggest supermarket chain by surface area, with 455 stores mostly located in the north and west of the country, while Dia has a larger presence in the south. Dia has said it will keep the El Arbol brand, taking on board the importance of branding in any merger deal. It will also develop El Arbol’s fresh produce range.

For more information on investing in Spain, contact corporate law firm Argali Abogados.

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