Chain Could Face Mega Liquidity Problem

Mega’s parent company, Alon Blue Square, in talks to sell stores to U.S. private equity firm, but insurance dilemma clouds horizon

The Alon Blue Square Group may have seen its share price gain 11.6% on Monday after the story broke that it’s in talks to sell its stake in the Mega supermarket chain to U.S. private equity firm Catterton Partners, in a deal valuing the company at NIS 1 billion, but its problems are nowhere near over. Sources told TheMarker that one of Israel’s two commerce insurance companies is refusing to insure additional credit that suppliers gave Mega.

ICIC offers insurance to businesses that have extended credit to customers or have commerce abroad. Now, the company is refusing to increase its total exposure to Mega, meaning suppliers who are yet to be paid by the supermarket chain cannot take out additional insurance to protect themselves against the chance that the chain does not pay.

However, ICIC is still insuring suppliers’ credit to Israel’s other supermarket chains.

There are two main credit insurance companies in Israel – ICIC and Clal Credit Insurance, which is controlled by Clal Insurance. As far as is known, Clal has not made any strategic decisions regarding Mega. Clal’s parent company, IDB, owns a controlling share in competing supermarket chain Super-Sol.

ICIC apparently reached its decision on Mega due to the situation of Alon Blue Square.

This puts Mega’s suppliers in a difficult position. Mega - Israel’s second-largest supermarket chain - does not pay its suppliers in cash on the spot, but generally only after at least 60 days. The suppliers, in order to ensure that they get their money, take out insurance from a company like ICIC, which commits to give them 85% of the sum should Mega not pay.

Not all suppliers take out credit insurance; it is bought mostly by big suppliers such as Osem, Tnuva and Unilever. Most smaller suppliers cannot afford it.

A senior player in the food sector noted that ICIC’s decision was a sign that the insurance companies believe Mega’s state is worsening, and that they lack faith in the company. “Suppliers tied to multinational corporations need trade insurance as a matter of policy, and if they can’t get it, then Mega will have a problem,” the source said. This will become an issue if Clal stops offering insurance to Mega suppliers as well, he said.

“At the moment, the suppliers are still feeling their way and not doing anything, but things could worsen and they could stop supplying Mega, supply it with less or demand payment in cash, and then Mega will face liquidity problems,” said the source.

Mega stated: “Mega’s payment ethic vis-à-vis its suppliers is among the highest in the sector,” adding that it did not believe that suppliers who wished to take out credit insurance had a problem.

Meanwhile, it emerged that talks are underway between Mega’s parent company, Alon Blue Square, and Marc-David Bismuth, a Catterton partner and former senior executive at French hypermarket chain Carrefour, for control of the supermarket company. A Carrefour rival in France, Auchan, is likely to join the deal after its executives visited Mega in recent days.

Mega operates 213 branches across the country. Mega also holds a 51% stake in Eden Teva Market, which operates 21 organic food stores, including nine at Mega supermarkets.

Auchan operates 1,495 hypermarket stores and had 23 billion euros in sales in the first half of this year, 3.4% above the same period last year.

Mega is implementing a strategic plan to launch discount stores in city centers across Israel. In the first half of the year, Mega made an operating profit of NIS 8 million on sales of NIS 3.2 billion, compared with NIS 48 million on NIS 3.3 billion a year earlier.

Today it will launch its first You brand store to replace the Mega Bool chain, which started business in December 2008 but failed to take off. Also, the Mega Ba’ir chain recently announced that it will lower prices, with the chain considering other steps to boost market share.

Mega’s market share has fallen in recent years, mainly because it has responded much more slowly to market changes than a major competitor, Super-Sol. According to consulting company Czamanski Ben Shahar, Mega’s market share dropped to 11% in 2013 from 16% in 2008.

David Bachar