March 20, 2019 / 6:00 AM / a month ago

Struggling Spanish supermarket chain DIA faces day of reckoning

* Takeover bid could turn on shareholder vote

* Two rival capital raising plans in play

* DIA must shore up balance sheet to avoid threat of insolvency

By Isla Binnie and Andrés González

MADRID, March 20 (Reuters) - Shareholders in Spain’s DIA are due to choose between two competing rescue plans for the faltering supermarket chain on Wednesday in a vote which could decide whether Russian tycoon Mikhail Fridman’s investment fund proceeds with a takeover bid.

A familiar sight on Spanish high streets, DIA has failed to lure back consumers who turned their back on its no-frills model as the euro zone’s fourth-largest economy pulled out of recession.

In play on Wednesday are two capital-raising proposals, one from the company’s board and another from Fridman’s LetterOne (L1), the biggest shareholder with 29 percent.

The board’s plan is part of a deal with creditors, struck in December after three profit warnings in 12 months, to raise capital by 600 million euros ($681.2 million) in return for a sorely-needed liquidity injection.

Faced with a hefty payout to maintain its stake, L1 launched a takeover bid contingent on shareholders blocking that deal and backing its own 500 million-euro capital hike.

L1’s bid values DIA at just over 410 million euros.

Each side has rubbished the other’s plans to catch up with domestic rival Mercadona and German discounter Lidl, which have stolen a march on DIA by investing heavily in their stores.

Adding urgency, DIA needs to re-balance its negative equity position to avoid the threat of insolvency, after booking heavy losses in 2017 and 2018.

DIA said on Tuesday its banks had agreed to extend existing loans if its rights issue goes ahead. The conditions include that the group posts core earnings of at least 174 million euros and transfers stores to a subsidiary.

Shares in DIA, which fell 90 percent in 2018, rose on the news, but remained a few cents below L1’s 0.67 euro offer price.

A small group of shareholders, which says it holds around 2 percent of DIA’s stock, has proposed its own plan, including a capital hike worth 150 million euros.

DIA says it could improve core earnings as early as 2020 by focusing on its own-label goods, selling more fresh produce and offering personalised promotions in a plan which would also cut around 1,500 jobs.

Meanwhile, L1, which owns Britain’s Holland & Barrett, has touted the sector know-how of its retail team and advisory board, which include former executives of LIDL, Russia’s X5 Retail Group and France’s Carrefour.

Under L1’s calculations, it will take at least four to five years to restore the business. ($1 = 0.8808 euros) (Editing by Louise Heavens)

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