A Drug on the Market? New-Pharm Is Up for Sale

Buyers likely to be wary of acquiring a distant No. 2.

It’s as if he doesn’t have enough on his plate finding a buyer for the financially troubled Israeli franchise of Office Depot and keeping it out of receivership, while also launching the Cost 365 discount supermarket chain to go head-to-head with Rami Levy.

But it seems Rami Shavit, controlling shareholder and CEO of Hamashbir 365 Holdings, is also looking to peddle the company’s 68.3% stake in the New-Pharm drugstore chain at a company-wide valuation of NIS 150 million.

Hamashbir, built around the venerable Hamashbir Lazarchan department store chain, had just NIS 2.5 million in liquidity at the end of September on its unconsolidated balance sheet and could use the cash infusion from the sale. Its bonds are trading deep in junk territory at 40% yields, indicating how jittery investors are about the company.

Potential buyers apparently might be willing to consider buying New-Pharm’s operations but not the company itself, and for no more than NIS 100 million tops. New-Pharm has 105 outlets, 38 of these consisting of points-of-sale within Hamashbir department stores.

Prospective buyers have two reasons to be wary: New-Pharm lent the Hamashbir group NIS 32 million, meaning they would acquire the payback risk along with the shares; and Shavit insists on keeping the New-Pharm sales outlets going in his Hamashbir stores, turning Hamashbir into a New-Pharm franchisee. This would also require Hamashbir to purchase the estimated NIS 70 million of inventory in its stores currently held on consignment by New-Pharm.

Doling out NIS 70 million would be a problem considering Hamashbir’s cash-strapped circumstances so Shavit would prefer spreading it over the long haul. It is hard to imagine, though, that any buyer would be inclined to becoming Hamashbir’s banker by extending long-term credit.

Beyond all this, New-Pharm’s profitability is marginal at best. Its operating profits for the first nine months of this year, NIS 6.5 million, were 40% lower than in the previous year and just 0.76% of its NIS 844 million turnover while the bottom line showed a NIS 260,000 loss.

Even in 2011, a strong year for the chain, operating profits totaled NIS 14.3 million, just 1.3% of revenues. In the last 12 months its Ebitda totaled NIS 25 million, 2.2% of turnover, compared with 6% to 7% generally seen in the industry.

 The exaggerated NIS 150 million asking price for New-Pharm is one-tenth the company value at which Israel Discount Bank is set to acquire 10.5% of rival Super-Pharm from its CEO Lior Reitblatt and Leumi Partners. New-Pharm’s turnover is just 30% that of Super-Pharm.

All this serves to underscore the continuing management failure of Shavit and Roni Elroy, owner of the 31.7% balance through Isal Amlat Investment.

On Sunday Isal’s shares in New-Pharm were placed under receivership on behalf of Mercantile Discount Bank. The shares had been liened to the bank by Isal’s failed parent company, Kaman Holdings, to cover NIS 31.5 million in unpaid debt. It won’t be easy for the receiver to find a buyer for the shares either, and not only because they constitute a minority stake.

In December 2007 Isal sold control of New-Pharm to Shavit’s Hamashbir for NIS 55 million, including NIS 43 million in a share swap, and the transfer of Hamashbir’s cosmetics business to New-Pharm.

The deal involved three separate signed agreements on allocation of retail floor space, joint marketing and advertising, and partnership in customer membership clubs. These agreements should make the sale of New-Pharm shares a real challenge.

One of the most interesting facets of these agreements is that Isal didn’t insert any escape clauses in the event they would predominantly serve Hamashbir’s interests at its own expense. The agreements were set to expire three months from the date Hamashbir’s stake in New-Pharm falls below 20%, so Isal and its receiver will find it hard to unload the shares before Shavit does.

Shavit replied that Hamashbir isn’t selling its stake in New-Pharm but was asked by attorney Ronen Matry, the receiver of New-Pharm shares on behalf of Mercantile Discount and Kaman, to find a solution for disposing of the shares for everyone’s benefit.

“Arrangements between Hamashbir and New-Pharm were reported and agreed upon by all sides and greatly benefit New-Pharm,” Shavit said.

“Various interests are making claims and expressing reservations about the company’s worth and its commercial agreements, causing unnecessary damage. Those parties won’t make the slightest impact on the framework of agreements between New-Pharm and Hamashbir.”