The companies that stock the shelves of Mega, Israel’s second-largest supermarket chain, have grown anxious in recent days and are demanding financial guarantees and in some cases reducing deliveries to hedge their risk, leading to shortages at some stores.
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The source of the suppliers' worries is Mega’s parent company, Alon Blue Square, whose bondholders are threatening to back out of a debt bailout for the financially troubled supermarket chains, which was approved over the summer.
Holders of Alon’s Gimmel series bonds have been meeting with management to sort out the issues, but the mood is pessimistic. Alon’s Tel Aviv Stock Exchange-traded share price dropped 6.2% yesterday to close at 1.42 shekels.
“No one can blame me and the current management for the current condition of Mega and Alon Blue Square,” said Avigdor Kaplan, Alon’s CEO and chairman of Mega. “We’re working around the clock but we’ll succeed in our mission only if you — the bondholders, the banks and the suppliers — let us work.”
Kaplan was brought in earlier this year to help rescue the supermarket chain, which has been squeezed by high costs and competition from discounters, and engineered a bailout that encompassed suppliers, bondholders and banks.
But Ofer Gazit, who represents the bondholders, said Alon’s controlling shareholders, Shraga Biran and a group of kibbutzim, failed to contribute enough capital into any rescue plan.
“If the court dismantles the debt bailout package that was agreed on, that will cut off supplies to the chain. Within 48 hours, they won’t have any fresh products on their shelves — and that will spell the end,” said one supplier, speaking anonymously.
Some suppliers, like the giant importer Neto, stopped deliveries to Mega supermarkets last July after Mega asked a court to provide protection from creditors. Other suppliers, like Diplomat and Leiman Schlussel, are continuing to stock Mega shelves but only partially. But many of them are reducing the deliveries even more amid the uncertainty.
“A problematic conversation has started in the market about Mega’s ability to meet its debts to suppliers,” said one supplier, who spoke on condition of anonymity.
“You have to understand that our relations with Mega aren’t operating on the basis of confidence but on the basis of guarantees. In the market, they’re worried that one supplier will come and say, ‘Because Alon isn’t standing behind Mega, we’re toughening our terms in the bailout,’” he said. “A snowball begins to roll and then the question is where does it go. It’s apparent that Mega hasn’t yet been turned around because its turnover isn’t that big. It has huge debts and not enough backing from shareholders.”
For Mega, the new crisis couldn’t come at a worse time. Management has been working to revive the chain and increase sales, already coming close to its weekly target of 85 million shekels, which it hoped to reach by next April. But recent events are threatening to undermine the progress.
“If the bondholders ruin the debt agreement and go back to the court and sales drop for a few weeks, it’s not clear [Mega] will be able to get back on its feet. The current uncertainty is just about the worst thing for them,” said a manager at a competing chain, who asked not to be named.