In November 2009, Discount Investment Corporation surprised investors with a tender offer to buy back 8.3% of the shares in its subsidiary, retail chain Super-Sol, for NIS 423 million. The buyback increased Discount Investment’s stake in Super-Sol, Israel’s biggest supermarket chain, to 46.2% of the company’s share capital and 50.3% of its voting rights.
The tender enabled Discount Investment to consolidate its results with those of Super-Sol. But the main goal was to take advantage of an international accounting standard, IFRS 3R, to generate a gigantic capital gain of NIS 1.29 billion.
How was that accomplished? After the buyback, Discount Investment booked its holding in Super-Sol based on the value at which the buyback had been done. The discrepancy between this value and the value in the books before the buyback (which had been based on Discount Investment’s share of Super-Sol’s shareholders equity) was NIS 1.29 billion. That was the capital gain booked in Discount Investment’s first-quarter financial statement for 2010.
Discount Investment did not waste that manna from the heaven of creative accounting arranged by Dr. Eyal Solganik, deputy CEO of IDB Holding Corporation (the company at the top of the whole IDB pyramid; Discount Investment Corporation is one of its subsidiaries). Solganik is also the group’s chief financial officer. Discount Investment proceeded to distribute NIS 1.52 billion in dividends.
The thing is, after Discount Investment finished buying back Super-Sol stock, the retail chain’s business environment badly deteriorated. The cost-of-living protests last summer, mounting consumer awareness and, mainly, the constant increase in shelf space as competition ramps up have forced Super-Sol to resort to aggressive discounting.
The upshot is that Super-Sol stock has fallen 30% in the last 12 months, so the value of Discount Investment’s stake in the chain shrank to NIS 1.42 billion. But the value of the stake in Discount Investment’s books is NIS 2.08 billion, which translates into a difference of NIS 633 million.
Discount Investment says that when preparing its financial statements this year, it will consider commissioning a third-party appraisal for the chain and making a provision. This is because Super-Sol’s value in its books has been higher than its value on the market over a long period.
But there’s no certainty that any provision will be necessary, Discount Investment adds, and there’s no saying what its scope will be. Whatever the scope, the provision will deepen the hole in the company’s balance available for dividends.
That negative balance totaled NIS 2 billion at the end of the third quarter, following the aggressive dividend payment and the NIS 2.3 billion loss posted for the first nine months of 2011.
Ostensibly, the assessor will have some room when evaluating Super-Sol. But he will have to prove that his conclusions are consistent with the paper Discount Investment presented with its financial statement for 2010. Based on an external appraisal by Itzhak Swary, Discount Investment concluded that no provision was necessary.
But cut-throat competition in the retail sector and soaring operating costs caused Super-Sol’s operating profit to tumble 44% in the third quarter from the same period in 2010, to just 2.4% of sales.
So it’s doubtful that Swary’s assumptions hold water anymore. It’s also doubtful that another external assessor could change the facts, given the clear and obvious increase in the sector’s risk.
