Rami Levy, the discount food retailer, confirmed on Sunday it was in preliminary talks to buy all or part of the ailing Mega supermarket chain, a move that could turn the upstart grocer into Israel’s second biggest supermarket chain.
Responding to media reports of negotiations, Rami Levy said in a statement to the Tel Aviv Stock Exchange that it was undertaking a “preliminary exploration” of a possible acquisition, “just like other business explorations all the time.” Industry sources told TheMarker that the odds of a deal happening remain low.
Alon Group, the closely held company that controls Mega, declined to confirm or deny talks.
“None the other chain owners want to buy Mega as a while, only parts of it,” said a supermarket executive, who explored buying Mega himself. “The sales at the individual stores don’t justify the rent it’s paying .Anyone buying Mega has to be confident they can double turnover in stores, and the odds aren’t good that anyone can do that.”
If the two sides were to reach a deal, however, the acquisition would catapult Rami Levi into the No. 2 spot among Israeli supermarket chains, after Super-Sol. The discounter has about 30 stores and turnover last year of 3.4 billion shekels ($875 million), compared to Mega’s 183 stores and sales of 5.8 billion shekels last year.
Super-Sol, by comparison, has 283 stores and 2014 turnover of 11.6 billion shekels, although like Mega it has been struggling to recapture market share from Rami Levy and other low-price competitors such as Victory.
In all events, investors were intrigued by the possibility. Shares of Alon Blue Square, Mega’s parent company, closed 5.4% higher at 9.80 shekels in a generally down day for the Tel Aviv Stock Exchange. Rami Levy shares finished up 2.4% at 160.90 shekels.
Mega contends with high costs, including labor in addition to rent, as well as debt of some 400 million shekels and a persistent reputation as a high-priced chain. Last year Mega posted an operating loss of 239 million shekels.
Chains such as Victory and the off-brand retailer Ehad looked at buying some of Mega, but all looked askance at its powerful unions and high rental costs. Three years ago, Rami Levy explored a deal to buy 50 Mega stores, but Alon pulled out amid antitrust concerns.
Industry sources said the antitrust issue remained a problem, especially with regulators under pressure to lower food prices and ensure competition. Officials were heavily criticized when Super-Sol acquired Club Market, an ailing chain, in 2005. Foreign food retailers that Alon approached expressed no interest in entering the Israeli market.
What Mega does have is stores in good locations in the center of the country. Industry sources estimate that only about 5% of Mega and Rami Levy branches serve the same geographical areas.
The extent of Rami Levy’s success by comparison is reflected in its share price, which has risen 115% in the past five years, giving the company a 2.2-billion-shekel market capitalization. That’s bigger than Super-Sol’s 1.9 billion shekels and may enable Rami Levy to finance part of a Mega acquisition by paying in shares instead of cash, sources said.
“Mega’s owners, Alon Blue Square, are in a race against the clock. As time passes and a question marks hangs over the company, it loses more and more money,” said one industry executive who asked not to be identified. “Meanwhile, the owners aren’t injecting capital into the company as it needs to lower prices and compete.”
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