The keys to DIA's stock market crash

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What is happening with DIA? Many wonder how such a powerful international group in the distribution sector could collapse. And it is that, its value in the stock market has fallen 37%. At Economipedia we unravel the causes of the fall in DIA shares.

Markets are very sensitive to predictions of future results. For this reason, the JP Morgan report has fallen on DIA and its shareholders like a jug of cold water. Anticipating the poor results, the US investment bank lowered the unit price of its shares from 2.10 euros to 1.70 euros.

Important drop in sales

The reasons for JP Morgan issuing an unfavorable report are based on the decline in DIA's sales. If we compare the sales of the third quarter of 2018 with the sales of the third quarter of the previous year, we observe that these have fallen by 9% compared to the previous year.

And as usual, the lower the sales revenue, the lower the profits. Here is another argument why JP Morgan has downgraded the value of DIA. Taking EBITDA as an indicator, which is the profit before taxes, interest, depreciation and amortization of the company, we see that this will be between 350 million and 400 million euros. This is a notably lower figure than the EBITDA achieved the previous year.

Consequences of the crisis in Argentina

To add insult to injury, DIA, which develops a good part of its business volume in countries such as Brazil and Argentina, is being severely affected by the crisis in both countries. The poor performance of the economy in Argentina and Brazil has been noted in DIA's revenues, which have continued to decline since 2016.

In relation to Argentina, the drop may be even greater. This is explained because the companies that operate in Argentina will have the obligation to adapt to the accounting standards for economies with hyperinflation. The application of these regulations could lead to negative financial consequences that have not been included in the DIA provisions.

Profit warning and suspension of the dividend

The DIA itself has added fuel to the fire by announcing a “profit warning”. Let us remember that a "profit warning" or profit warning is a communication from the company to shareholders in which it informs of the fall in profit. Generally, a "profit warning" is usually made about two weeks before the listed company publishes its results. In this sense, DIA will publish its results on October 30 (within two weeks).

These kinds of announcements are accompanied by negative consequences for listed companies. Hence, DIA shares plummet on the stock market. However, the collapse of the Spanish distribution group is not the result of a bad day or a temporary situation. It is a situation that has been dragging on for some time, as investors have been suspicious of its business model for two years.

Another consequence of the so-called “profit warning” has been the suspension of the dividend for the year 2019. These types of decisions are frequent when a company faces a difficult financial situation. Instead of distributing liquidity among its shareholders, it uses the financial resources available to service debts, cover costs or make investments that allow it to fly back.

Changes in the directive and a possible takeover bid

The effects of a significant drop in sales such as the one suffered by DIA, not only have a consequence on its market value. In any company, management is usually held responsible for the negative consequences of its management. For this reason, Ana María Llopis has resigned as president. The poor results also cost Ricardo Currás the CEO position.

The large drops in the value of DIA seem to be the prelude to a takeover bid. The LetterOne Investment company, in the hands of the Russian billionaire Mikhail Fridman, is positioned as the great candidate to take control of DIA. Thus, LetterOne Investment has shown signs of preparing the ground for acquiring control of DIA. Stephen Du Charme, as a director of LetterOne Investment, has been in charge of replacing Ana María Llopis in the presidency and LetterOne, controlling 29% of the capital, is very close to owning the 30% of the capital that is necessary to be able to undertake a OPA.

With DIA plummeting, LetterOne's potential takeover bid could come at a very profitable price for the interests of billionaire Mikhail Fridman.

It will be interesting to see how the DIA situation evolves. The shadow of a takeover bid is on the horizon and many remain awaiting a new strategic plan that will allow the company to re-emerge.

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