Israeli Discount Grocer’s Newest Shoppers: Foreign Investors

American and European investors are keen on Rami Levy supermarkets’ rate of growth and like the company's generous dividend policy, but local investment institutions remain skeptical.

Sharp-eyed consumers who did their shopping in recent weeks at Rami Levy supermarkets in Jerusalem, Modi’in or Netanya might have noticed unusual visitors in the stores.

Among the masses of Israeli shoppers who landscaped the aisles and check-out counters at the discount grocery chain were a gaggle of American and European investors. Though they were casually dressed, they looked a bit more starched and put-together than the average Israeli on a supermarket run.

On some of the visits, the foreigners roamed the aisles alone, coming without any advance notice. On other occasions they were accompanied by representatives of the company and by Rami Levy himself, who made it a point to come to the meetings in a suit.

The visitors scrutinized the branches they toured from top to bottom. They asked about the products sold at the delicatessen counters, inquired about the work routines of the shelf-stockers and conversed with the employees. They stopped at the vegetable stands, which captivated them, and after examining them pulled out their smart phones and took pictures of the produce − expressing enthusiasm for the low prices.

At the end of the visit the foreign analysts posted representatives near the cash registers to count the customers. The representatives also examined the kinds of purchases the customers made and how much time they spent on the checkout lines.

Comparing with Super-Sol

During the visit to the Modi’in branch, the inspection team posted another person at the cash registers in the nearby Super-Sol branch, whose job was to examine the same parameters and compare them with the data from the Rami Levy branch.

The investors wanted to scout out the territory before putting significant sums of money into the chain’s shares. And it seems Rami Levy passed the test: In the past two weeks, two foreign institutional investors have acquired significant proprietary interest of the supermarket chain.

At the end of March, MSD, the American computer billionaire Michael Dell’s private investment firm, bought shares equal to 4.8% of the company to raise its total holding to 6.1%. This week Fidelity Investments, the U.S.-based mutual funds group, bought 5.03% of the company for NIS 100 million.

Rami Levy shares on the Tel Aviv Stock Exchange have risen 30% this year and 10.9% in April alone. Yesterday, they ended 2.5% higher to close at NIS 167.50.

These latest moves are another step up for the man who started out in the 1970s with a small family store in the Jerusalem’s Mahaneh Yehuda market. Now Levy is getting an international seal of approval. Even if Levy himself needs the help off an interpreter in his contacts with English speakers, it turns out that his financial data are strong enough to attract the foreigners.

“We meet with a lot of representatives of funds from abroad,” says Ran Efrati, the company’s legal adviser. “Every two weeks a representative of a different financial organization comes here to meet us. In addition to that, many executives of groups are asking us to come see them abroad. As of now, we are in contact with 16 financial groups around the world.”

Not just NIS 1 chickens

This matter of the foreigners raises the question of whether Israeli institutional investors haven’t remained locked into the preconception of the folksy businessman of the people who sells chicken for NIS 1 a kilogram − perhaps hindering them from committing big money like the foreigners are doing.

Foreign institutions now hold 18% of the Rami Levy shares. Among them are nine foreign funds from the United States and Britain. Israeli institutions hold a mere 10% of the shares.

This week Israeli institutional investors greeted the foreigners’ interest in Rami Levy with astonishment. They are wondering where else the chain can grow and what its next move might be. In mid-2012, Rami Levy was already examining buying some Mega Bool branches from the Blue Square chain.

In the future the foreign money circulating around Levy’s chain could support a large expansion move if there is a need for that. Mutual funds like Fidelity’s are only financial investors, but other organizations could definitely give financing to strategic moves.

“Maybe I’m underestimating the company but my sense is that there’s something here that isn’t on the surface,” said a senior figure at an Israeli institutional investor this week.

“A scenario in which a large Israeli chain like Blue Square falls apart and a third party like Rami Levy comes along and buys half of its branches could put it in a different place. Another possible scenario would be one in which Rami Levy takes a company like Golf and doubles its operations by buying it − with his management and the foreigners’ money − and all this in the context of a platform that has been working for a decade now” he said.

Foreign interest in the Rami Levy chain stems in part from the change that has occurred in recent years in they way they operate in Israel. In May 2010 Israel’s stock market was promoted from emerging market status to one of a developed country. As a result, foreigners stopped investing ni Israeli shares on an industry-by-industry basis and began selecting individual companies to invest in, comparing Israeli firms to their counterparts in other developed countries.

In this context, someone who has worked with the foreigners says the benchmark for comparing Rami Levy is the BIM retail chain, the discount market leader in Turkey, which operates 2,600 branches, and Colruyt, which controls 30% of the market in Belgium. This comparison could be indicative of the expectations concerning Levy.

In a comparison like this, it is possible to understand the choice by the foreign analysts from the large investors abroad as being based on the company’s unusually high rate of growth. Rami Levy’s revenues in 2012 increased about 25% and 7.5% in same-store sales. To this must be added the dividend policy, which takes 75% of the company’s profits.

Since Rami Levy’s market value of NIS 2.15 billion is small relative to the companies in which foreigners typically invest, it could happen that we will see increased holdings in the company even to 10%.

The great interest of foreign investors in the company is arousing curiosity about its future. Are the Israelis correct in looking at the high multiple at which it’s trading on the Tel Aviv Stock Exchange ‏(19 times trailing profits‏) and in suspecting an inflated stock price, or are the foreigners correct in looking at the company’s growth rate over the years and concluding that this growth will continue? 

Shiran Granot
Michal Fattal