Ex-supermarket Executive in Talks to Acquire Mega Chain

Jacob Gelbard, an Israeli businessman with rich experience in food retail and telecommunications, is holding talks to buy the ailing Mega chain of supermarkets from Alon Blue Square, TheMarker has learned.

• High prices, high costs and heavy debt weigh on Israel’s No. 2 supermarket chain
• Survey: Supermarket branches that stand alone charge vastly more

Gelbard is being backed by an unidentified group of foreign investors. The talks are for the group to buy the Mega in the City, You and Mega Bul brands.

Sources in the food retail sector said it was unlikely much cash would change hands in the sale, if it happens. That is because the investor group would assume the 300 million shekels ($77.9 million) in guarantees that Alon Group, Mega’s parent company, has provided on the supermarket chain’s debt.

Gelbard is known mainly as a telecommunications executive, serving as CEO of Partner Communications after two years heading up Bezeq and five years as CEO of its Pelephone mobile unit.

But Gelbard also spent many years in retailing and marketing: He capped a 17-year career as CEO of the Co-Op Blue Square supermarket chain before it was acquired by the Alon Group in 2003. He kept a connection with supermarkets, buying sites where three Mega stores are tenants and renting other space to other food retailers.

Gelbard and his backers are conducting their talks in parallel with Rami Levy, Israel’s biggest discount supermarket chain, which confirmed it was holding preliminary negotiations with Alon Group earlier this month. But the Gelbard group has an advantage over Rami Levy in that it would not meet up with any objections from the Antitrust Authority.

Antitrust Commissioner David Gilo is likely to be especially careful because regulators in 2005 approved Super-Sol’s takeover of the ailing Club Market chain, that eventually led to intolerable concentration in the food retail sector. Ironically, Gelbard was vice chairman of Club Market at the time it was sold.

With 183 stores throughout Israel and 6,500 employees, Mega is the country’s second-biggest supermarket chain, after Super-Sol. It has branches in prime locations, but it has a reputation for high prices and is saddled with high rental and labor costs. It ran up 239 million shekels in operating losses over the past two years.

Avigdor Kaplan, who recently took over as CEO of the closely held Alon Blue Square, succeeded in renegotiating the group’s repayment schedule for some 2.1 billion shekels of debt and raised cash by selling control of its Alon USA energy subsidiary.

Now Kaplan is trying to reduce Mega’s labor costs, which are 30% above the industry average, by renegotiating collective bargaining agreements.

Eli Eyal, chairman of the Mega workers committee, said that on Thursday the two sides reached a draft agreement on a five-year pact that will lead to some 40 million shekels in salary cuts, but Eyal warned that the unions would not agree to some of Mega’s assets being sold.

“We won’t let anyone buy part of Mega,” he said. “We agreed to a recovery program based on the employees injecting a pretty serious sum and Alon injecting a lot more money. In addition, they agreed to name two workers to the board. I don’t believe the company will be sold and the draft agreement will be signed next week.”

He added that if Mega were sold, the agreement requires the new controlling shareholders to honor it.

In any event, the cost savings will not solve all of Mega’s problem and either Alon or Mega’s new owners will have to inject hundreds of millions of shekels into the business, in addition to writing off debt and closing unprofitable stores.

Neither Gelbard nor Alon Blue Square responded to requests for comment.