UPDATE 2-Spanish grocer Dia in talks to buy peer El Arbol

Mon Dec 16, 2013 7:33am EST

* Deal worth 100 million euros excluding debt - report

* Would consolidate Dia as third largest grocer in Spain

* Shares gain 3.4 percent (Recasts with confirmation of talks, adds details on stores and ratios)

By Tracy Rucinski

MADRID, Dec 16 (Reuters) - Spanish discount grocer Dia is in preliminary talks to buy debt-burdened supermarket chain El Arbol, in a deal that would consolidate its position as Spain's third-largest retailer behind Mercadona and France-based Carrefour.

Dia, whose discount format has thrived in Spain during a prolonged economic slump, has been on the hunt for distressed rivals to boost its domestic presence.

Earlier, newspaper Expansion cited sources close to the deal as saying the acquisition could be agreed for around 100 million euros ($137 million), excluding debt.

In a regulatory filing on Monday, Dia confirmed initial talks to acquire El Arbol as part of its strategy to seek growth opportunities, but gave no financial details, saying only that no agreement had yet been reached.

"(This is) potentially positive for Dia if it manages to increase its scale in Spain at an attractive valuation," Espirito Santo Research said in a note to clients.

Shares in Dia climbed 3.4 percent to 6.35 euros by 1140 GMT, making them the top gainers in Spain's blue-chip index.

A 100 million euro enterprise value for El Arbol would be equivalent to five times 2012 earnings before interest, taxes, depreciation and amortisation (EBITDA), or 12 percent of sales, analysts said.

El Arbol, controlled by a group of savings banks and two Spanish businessmen, is struggling with net debt which reached 31 million euros in 2012 after an acquisition spree in recent years. Its net profit in 2012 was 2.1 million euros.

It is Spain's 15th-largest food retail group - according to analysts citing research group Euromonitor - with 452 stores, most of which are in the northern part of the country, making it a good geographical fit for Dia which has a larger presence in the south.

Last year Dia bought the Spanish and Portuguese arms of insolvent German drugstore chain Schlecker in a move to diversify its product range and expand its presence on the Iberian peninsula.

A deal with El Arbol would allow Dia, with 7,182 stores internationally, to raise its domestic sales and market share by 20 percent, Espirito Santo said.

The company, with 5 billion euros of annual sales in Spain and a market share of 9 percent, lags behind its main rival, unlisted Mercadona, which has 11 billion euros of sales and a 20 percent market share.

($1 = 0.7283 euros) (Editing by Louise Heavens and David Holmes)