Rival Stores Mull Bids as Mega Gets 30-day Stay of Proceedings

Judge appoints three trustees to ailing grocery chain, with workers union announcing all stores to be open Tuesday after strike.

Ofer Vaknin

As a court granted a stay of proceedings Monday to ailing supermarket chain Mega, competitors geared up to make bids to buy part or all of the chain’s branches – a deal that could turn any one of them into the country’s second-largest supermarket chain.

Mega received approval from the court for a 30-day stay of proceedings to protect it from its creditors.

Lod District Court Judge Ilan Shiloh named three trustees to the struggling supermarket chain, which owes its creditors 1.4 billion shekels ($354 million).

The workers union announced that all stores would be open Tuesday. Stores were shut Monday due to a strike.

The owners of Alon Blue Square – Mega’s parent company – were not present at the court hearing. Hundreds of workers showed up to protest, angry at losing their place of employment. They directed their anger instead at the company’s executives.

“This is Paracetamol for a cancer patient,” said a workers’ representative. “They’re just postponing the end. We don’t want unemployment and we don’t want to start again at a new company. We want to keep working for Mega.”

The grocery chain’s lawyer, Amir Bartov, told the court Mega was starting the stay of proceedings in the best state it could be in, given the situation –

“after undergoing an efficiency process, closing branches, reducing its workforce. These past months weren’t wasted. Mega currently has more than 160 million shekels in cash that can be used to continue operations during the stay of proceedings. We don’t need favors from anyone,” he said.

Bartov added that the chain has a plan to get employees back to work, so long as suppliers keep supplying the supermarket with goods.

“This time, as opposed to previous times, anyone who supplies Mega with goods will be insured and doesn’t have to worry that they won’t receive their payment,” he promised.

Bartov noted that Mega hasn’t sold off its Mega Ba’ir brand stores, which are local neighborhood stores at a higher price point.

“Mega Ba’ir’s stores are in the best locations in the country and serve very good neighborhoods in the center, and it’s always been profitable, Mega’s strongest asset,” he said.

There were no objections in the courtroom to approving the stay of proceedings. However, several suppliers objected to the owners’ intent to fund the 30-day stay of proceedings from Mega’s own coffers, demanding instead that parent company Alon Blue Square pay for operations at this time.

The representative of one supplier said their company is owed 8.5 million shekels. “The company kept supplying goods in keeping with its commitments. It’s infuriating that the money accrued in Mega’s coffers will be used in full to fund operations during the stay of proceedings and not to pay suppliers who supplied Mega in keeping with the court-approved agreement,” said the representative. The representative accused Alon Blue Square of failing to make a 60-million-shekel payment for goods last Friday.

A representative of Alon Blue Square stated in response that the company had already injected 240 million shekels into the company.

Potential buyers

Mega’s potential buyers include many of Israel’s leading privately held supermarkets, as well as Super Sol – Mega’s main competitor and the country’s largest supermarket chain.

Mega has 114 branches of Mega Ba’ir, and 12 branches of its discount brand Zol B’Shefa. The chain recently sold its You brand of supermarkets. Sector sources say that some 25 branches of Mega Ba’ir account for 80% of the chain’s EBITDA, while another 30-40 branches are losing money.

A source said that Mega has gross profit margins of 30%, but inflated headquarter and warehouse expenses. Fixing the latter could enable the chain to achieve operating profits of 3% to 4%, said the source.

Sector sources anticipate that negotiations will start at 150 million shekels, with the chain ultimately selling for up to 250 million shekels (about 2 million shekels per branch).

However, the buyer’s costs won’t end there. Many of Mega’s branches are old and neglected, and need significant renovations totaling 2 million shekels or more per store, said a sector source.

“The equipment is old, the refrigerators don’t work, some of the floors need replacing and, of course, the buyer will need to rebrand the stores,” said an executive at a midsize supermarket that does not intend to bid for the entire chain. And then there’s dealing with the entrenched organizational culture among workers. “A private discount brand that buys Mega Ba’ir as a single unit would be taking a big risk,” said the source.

So far, previous negotiations to buy the chain have fallen through, due in part to the significant wage cost of Mega’s employees, which is significantly higher than private supermarket chains.

However, Judge Shiloh stated in court Monday that he intends to favor a buyer who preserves jobs and gives the workers good terms.

Chief among the potential buyers is Rami Levy, famed for pushing down costs via his discount supermarket chain Rami Levy Shivuk Hashikma as well as his cell phone service provider. Buying Mega – and saving its workers from dismissal – could serve to boost Levy’s image. While long hailed as a consumer advocate, he has recently come under fire amid allegations that his own workers are mistreated.

Levy has been negotiating to buy all or part of Mega for months, on and off. He recently bought seven Mega branches for 39 million shekels, and is planning to open them soon under his own brand. Buying Mega Ba’ir in full could enable him to double his supermarket chain’s turnover.

Other potential buyers include Nahum Bitan, who owns the private supermarket chain Yenot Bitan. Bitan had previously conducted the negotiations that advanced the farthest to buy the chain, but the talks fell through over employees’ terms and the continuing employment of workers at company headquarters, as well as the high rental costs the chain pays to a fellow Alon Blue Square subsidiary. A Bitan representative said Monday  that the company was seeing what had changed following the stay of proceedings.

Another group, led by Yossi Segol and Eran Meital, which also held negotiations to buy Mega over the past few weeks, is also planning a bid to buy the chain.

Other supermarket chains, including Victory, Yohannanof, Co-op Shop and Super Sol, are likely to bid to buy some of Mega’s outlets.

While the Antitrust Authority is not expected to oppose the purchase of Mega by a major private supermarket such as Rami Levy, it might block a chain from buying individual branches depending on that supermarket chain’s concentration of stores in a given region.