Discount Investment Results to Suffer From Decline in Super-Sol’s Value in the Market

Discount Investment Corporation is likely to slash the book value of its Super-Sol holdings in its annual 2011 financial statements, the company said in a warning issued Monday. Shares of the supermarket chain have fallen 30% over the past year as its market value dove from NIS 4.4 billion to NIS 3.1 billion, its lowest in more than two years.

“In preparing Discount Investment’s financial statements for 2011, and taking into account the continuing negative gap between the market value of the Super-Sol investment and its value on Discount Investment’s books, Discount Investment is examining the need, in accordance with accounting principles, to record a write-down on the investment by an independent appraiser,” the statement said.

Writing down goodwill

Discount Investment, a holding company 73%-owned by Nochi Dankner’s IDB group, has a 46% stake in Super-Sol’s share capital currently valued on its books at a NIS 4.52 billion company value while holding just over 50% of the voting rights. Super-Sol is a major holding for Discount Investment and is reported on a fully consolidated basis in its financial statements.

Discount Investment will need to record a NIS 660 million provision on its income statement if the investment is completely written down to market value. Coming at the expense of goodwill attributed to Super-Sol, it would take a bite out of the bottom line and reduce earnings that could be distributed as dividends. But the provision could be lower if the appraisal determines that Super-Sol’s market value doesn’t reflect its true economic value.

Discount Investment began consolidating Super-Sol’s results in its reports in February 2010, when it purchased enough shares on the market to amass a majority of voting rights in the company, listing the investment at fair value. The move spawned intangible assets attributable to Super-Sol’s valuation, NIS 2.85 billion, generating a windfall NIS 1.29 billion in profit.

But the jackpot came with a catch: Recognizing the goodwill also requires that it be re-examined for necessary changes when preparing each subsequent annual financial report. If there’s a continuous decline in the company’s trading value, as in this case, a new appraisal must be performed, and consequently a write-down as well. The value of Super-Sol’s goodwill on Discount Investment’s books is currently NIS 1.18 billion.

Isralom Properties, controlled by Matthew Bronfman and Shalom Fisher and owner of about 18.5% of Super-Sol’s shares also announced late Monday that it’s contemplating making an adjustment on the investment’s book value ahead of its year-end results. At the end of the third quarter, the trading value of Isralom’s shares in Super-Sol reached NIS 616 million.

In its third-quarter 2011 statements, Super-Sol reported a 44% drop in operating income from the comparable period and a 60% plunge in net income. The falling shares and profits are mainly blamed on the social protests this summer that sent company management scurrying to lower prices, freeze price hikes and institute large-scale markdown sales at its stores. Lower profits reduce its ability to distribute dividends to the companies above it in the IDB hierarchy.

IDB Development owes NIS 1.4 billion

A write-down of Super-Sol’s value would add one more worry to a range of concerns on Dankner’s mind, such as raising capital to pay off NIS 250 million owed by IDB Holdings, and a NIS 1.4 billion debt in IDB Development. Also on his agenda is the sale of Mashav by Clal Industries and Investments to the Livnat family, his former partner. Mashav is the owner of the Nesher Israel Cement Enterprises monopoly and half-owner of Taavura Holdings.

Meanwhile, Dankner must contend with a slew of other obstacles: a profit warning issued by telecom giant Cellcom, in advance of its annual financial statements; repayment of NIS 1.24 billion in loans for the Plaza Las Vegas project; losses at newspaper publisher Maariv Holdings; and the profound impact that recommendations by the government-appointed economic concentration committee could have on the IDB group. Of course, Dankner will also have to combat the effects of the social protests on business.

Itzhak Swary, who performed the appraisal of Isralom’s stock in Super-Sol at the time it was purchased, valuated the company at NIS 3.75 billion to NIS 3.9 billion. Swary is likely to be chosen to appraise the Super-Sol holdings of Discount Investment this time as well.