Mega to Turn to Court Unless Suppliers Extend It a Lifeline

Last-minute meeting aims to buy embattled supermarket chain a few days to wind up talks with a potential buyer.

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A Mega supermarket.
A Mega supermarket.Credit: Ofer Vaknin

Mega supermarket chain will make one final attempt Thursday to reach agreements with the food manufacturers and importers who stock its shelves to keep delivering goods. If it fails, the financially embattled supermarket chain will immediately seek protection from its creditors in court, industry sources said.

Avigdor Kaplan, CEO Mega’s parent company Alon Blue Square, is due to meet with suppliers Thursday morning, together with the president of the Manufacturers Association trade group. He is expected to ask them to continue stocking Mega’s stores, even though it has no cash to pay them and has exhausted its ability to offer guarantees for future payment.

The meeting comes after Alon Blue Square’s board met Wednesday evening to approve the plan, which is aimed at buying the supermarket chain a few days to complete negotiations with a potential buyer.

The shelves and freezers in the chain’s 114 Mega in the City stores, as well as in the 12 stores of its Zol V’Shefa chain, which is geared toward ultra-Orthodox shoppers, stand half empty, deterring customers and deepening its losses. Suppliers have reduced or in some cases cut off deliveries since the company reached a debt-bailout agreement with supliers in court last July, fearing that they won’t be paid.

However, sources at Alon Blue Square said Wednesday that the shortfall has grown more severe in recent weeks as increasing numbers of suppliers, including Tnuva and Osem, two of Israel’s biggest food makers, demand payment in cash, tougher credit terms or stronger guarantees against future payment.

In some cases, they have refused guarantees from Alon Blue Square itself because of the “going concern” warning attacked to its latest financial reports.

Shares of Alon Blue Square have fallen sharply since the summer as news of its financial problems mounted. Its shares plunged Wednesday, losing 25.8% to end at 97 agorot (less than 25 cents.)

Once Israel’s second-largest supermarket chain, Mega has been pummeled by poor management and the rise of discount competition offering prices it couldn’t meet. It has already reached agreement to sell off its flagging discount You stories and has been in talks to sell its core brand, Mega in the City, whose branches are based in residential areas.

The most serious candidates to buy the Mega in the City stores is a group led by Yossi Sagol, whose family controls Keter Plastics, and Eran Meital, a former Delek Real Estate CEO But the negotiations have hit a roadblock because Alon Blue Square hasn’t been able to reach an agreement with suppliers to keep deliveries going until the chain changes hands. They also want Blue Square Real Estate, a publicly traded sister company of Mega, to reduce the rent it charges for Mega stores.

Alon Blue Square’s plan to seek court protection, however, risks backfiring, at least in the short term. Deliveries are expected to be even smaller than usual on Thursday, because suppliers are worried the court will freeze payments.

“The minute it’s clear that the deal to sell the chain has failed and that there are tens of millions of shekels that the chain needs to pay to suppliers on Friday, and that the owners aren’t willing to put money into Mega, suppliers will stop normally deliveries,” said one supplier, who asked not to be identified.

“I would assume that by Friday already there won’t be much in the way of merchandise in Mega,” he said. He termed Thursday’s meeting as “Mega spin,” which will have little impact on the decisions of suppliers to continue deliveries.

Alon Blue Square also faces a problem with unions over the sale. Potential buyers have said they want the union, which got a 33% stake in the supermarket chain last summer in exchange for deep wage cuts and firing, to return some of its shares without any payment, as well as take further pay cuts.

Eyal Eli, chairman of the Mega workers’ committee, told TheMarker on Wednesday that the union would not back down on pay issues but hinted that it might consider returing some of the shares it now holds.

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