Hamashbir Puts Its Expansion Drive Behind It

Too much debt was worrying the markets, so the operator of Israel’s biggest department store chain is looking to consolidate.

Hamashbir 365 Holdings Ltd., the company that owns department store chain Hamashbir Lezarchan, is shaking up its strategy after years of rapid expansion that saddled it with more debt than investors were comfortable with.

Rami Shavit, the group’s controlling shareholder, had taken pride in his strategy of expanding into areas like department stores, cosmetics, supermarkets and tourism. The idea was to attract members to the group’s Club 365 customer club and, in turn, bring in more shoppers and rack up more sales.

The strategy increased the club’s membership to 600,000 within three years, but success had an unfortunate side effect: The brand became viewed as tired and outdated, and competition grew. Trouble at subsidiary Office Depot, the Israeli franchise of the American office supplies retailer, also stung.

Investors on the Tel Aviv Stock Exchange have punished the company, sending its share price 67% lower in the four years to the middle of 2013. The yield on the company’s bonds shot up into the double digits as their price fell to a 68% discount on their par value. Bondholders holding NIS 70 million of debt in the Club 365 unit were worried enough to organize to protect their interests.

Shavit opted against restructuring and instead sold the group’s catering unit, Cibus, which generated NIS 67 million. That and other steps calmed bondholders, and the yield on bonds for the holding company fell as low as 15%. But the magic didn’t last, and after the Cibus sale was completed in August, the yield shot up to 22%. More work was needed.

“We’re changing our management focus so that from now on our sights will be on enhancing the value of existing companies, bringing in partners, and examining merger-and-acquisition possibilities for each company. It will be less about acquiring new operations,” Shavit said on Sunday, causing Hamashbir’s share price to jump 5%. Monday, Hamashbir gained another 2.6% to NIS 2.64.

“We’re talking about a major change,” said a person in the financial markets who requested anonymity. “Shavit led the old strategy and defended it, so it takes plenty of courage to change direction.”

The first piece of the new strategy was put in place in August when Hamashbir signed a binding memorandum of understanding with the American textiles and real estate company Nashone.

Under the deal, Nashone will invest NIS 134 million in Hamashbir 365 Holding and its Hamashbir Department Stores unit in return for a 32% stake in the latter. At the same time, Hamashbir Holdings will raise its stake in subsidiary Neopharm Group to 100% and merge the company with Hamashbir Department Stores.

Another part of the strategy calls for Hamashbir 365 to merge Club 365 into the holding company in a move to flatten the holding company’s structure and meet terms of new legislation limiting the number of tiers in a corporate pyramid. The merger would save NIS 5 million annually by increasing efficiency, the group said.

But the merger’s main motive appears to be to shore up the holding company’s finances by folding the revenue-generating subsidiaries into the company at the top of the group, with the hope that the value of NIS 110 million in outstanding bonds will rise, lowering their yield and letting the group raise debt more cheaply.

Following the merger announcement Sunday, Hamashbir 365 bonds jumped 6% and rose another 1.7% Monday, while Club 365 bonds dropped 2.5%. The differing directions reflected the improvement expected at the parent company and worries about he subsidiary.

Moti Kimche