(Bloomberg Opinion) -- A stand-off between Russian billionaire Mikhail Fridman and Ana Botin has ended with the Banco Santander SA chairman blinking first.
Fridman’s hostile bid for struggling Spanish grocer Distribuidora Internacional de Alimentacion SA won shareholder approval earlier this month. But Santander, DIA’s second-biggest lender, objected to a related deal to recapitalize the company. That refusenik stance threatened to trigger a default and wipe out Fridman’s equity within weeks of the takeover succeeding.
DIA needs a deep-pocketed owner to oversee an arduous turnaround after years of mismanagement that culminated in a 90% share-price fall in 2018 and a restatement of the accounts. Fridman’s L1 Retail amassed a 29% stake as the stock fell, leaving it nursing losses.
When DIA said in December it needed shareholders to stump up 600 million euros ($669 million) to cut debt, Fridman refused to bail out the discredited management team. In February, L1 Retail bid 300 million euros for the rest of the company (a 56% premium to the stock’s prior closing price) and offered to inject 500 million euros if the banks agreed to support the company, too.
But Santander cried foul at the blatantly favorable treatment of bondholders in the recapitalization plan. L1 Retail insisted 300 million euros of its equity injection should repay a bond maturing in July and the rest should be invested in the business. By contrast, DIA’s lenders were expected to extend their existing loans – taking an effective haircut – and to provide yet more credit.
Most of the banks swallowed this with modest resistance because the alternative would have been worse. There was too little time to come to an agreement with the fragmented bondholder group. Defaulting on the bond would have triggered a messy insolvency and a fight among all the creditors for the assets. DIA’s suppliers would have demanded upfront payment, putting even greater pressure on the lenders.
The reputational fallout would have been severe. The lenders would have been accused of pulling the plug on a company that employs 40,000 globally. Yet Santander, the country’s biggest bank, protested almost to the end that bondholders shouldn’t be treated better than lenders.
It’s not usually Santander that blinks in a negotiation. But Botin is rational and eventually sanctioned the restructuring. Her protest has made a point. What’s more, the recapitalization isn’t totally bondholder-friendly. It gives no goodies to holders of DIA bonds maturing in 2021 and 2023. So while all the company’s bonds rallied on Tuesday, those due in July are just below par and the longer dated notes still trade at a substantial discount.
DIA is in a better place, with an appropriate capital structure agreed and Karl-Heinz Holland, former CEO of German discounter Lidl Stiftung & Co KG, taking charge.
It is striking how Fridman judged everyone’s pain thresholds with laser-like precision here. Shareholder approvals were just above the hurdle he initially set; the lenders’ agreement went down to the wire. But you don’t become as wealthy as Fridman by giving away a cent more than you need to.
--With assistance from Marcus Ashworth.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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