U.S. Investor Eyeing Stake in Parent of Food Retailer Mega

Shares in Alon Blue Square jump 7.4%; chain unveils plan to cut prices, costs.

Alon Blue Square Israel has been approached by a strategic U.S. investor, in all likelihood a U.S. retailing firm, about acquiring a 25% stake in the Mega Retail supermarket chain.

The news, along with Mega Retails’s plan to aggressively pursue the discounting segment of the marketing, lifted shares in Alon Blue Square, the food retailer’s parent company, 7.4% in Sunday'sTel Aviv Stock Exchange trading.

No further details about the feelers was available on Sunday, but the unnamed American retail chain could be viewing Mega’s low market valuation as a convenient entry point into Israel’s retail market. Even after Sunday's run-up in the share price, Alon Blue Square’s market valuation is just NIS 919 million.

With Alon Blue Square’s debt, together with those of Mega Retail amounting to an unconsolidated NIS 1.3 billion, the stock market is valuing Mega Retail at just NIS 500 million to NIS 600 million. That reflects its steadily shrinking market share and profit margins in recent years as it failed to meet competitive challenges from upstart rivals.

But, sources say, the potential investor likely values the company’s purchasing and logistical experience as well as the locations of its branches. It is still the No. 2 chain in food retailing, which could serve as the foundation for a sharp improvement in Mega Retail’s operating profitability, which today lags far behind that of its competitors.

Alon Blue Square’s controlling shareholders are David Wiessman, Shraga Biran and the purchasing arm of the Kibbutz movement.

Mega’s market share was slashed by more than half to 11.9% in 2012 from 25% in 2006. Industry sources says that while shoppers have become much more price conscious, the company’s Mega Bool discount brand failed to keep pace with heavy discounters such as Rami Levy Hashikma Marketing, Kimat Hinam, and Hatzi Hinam.

Operatng loss

Mega ended the first quarter with an operating loss of NIS 3 million. In 2012 its operating profits fell 27% to NIS 129 million, reflecting a 2% operating margin. This, however, rose to 3.1% in the last quarter of the year thanks to the shuttering of 11 money-losing stores, including seven during that same quarter.

The operating margin for Super-Sol, the industry’s top chain, was 3.5% in the first quarter of 2013 while at Rami Levy it reached 4.1%.

Rami Levy’s improving profitability, along with its quick pace of expansion and ability to generate much higher turnover than its competitors − NIS 19,300 per square meter in the first quarter compared with NIS 4,460 at Mega − explain why Rami Levy is trading at a company value of NIS 2.3 billion, almost quadruple the value of Mega. This is despite Rami Levy operating only 24 stores totaling 38,000 square meters of floor space compared to 211 stores and 365 square meters for Mega.

CEO Motti Keren admitted in a presentation to analysts last week Mega’s failure in the heavy-discount market and hinted the company would eliminate the Mega Bool brand. He conceded that the chain is considered high-priced. “Consumers perceive us as being thieves,” he said.

He also noted that the chain suffers from inconsistency in branding and in offering its customers value, while the pricing structure in uncompetitive. It’s most significant competitive advantage, he claimed, is widespread geographic distribution of stores in city centers.

Keren laid out Mega’s new strategic plan for rapid growth and turning the chain into a serious contender in price-based competition while maintaining gross profit margins by streamlining the supply chain by 1%, reducing floor space by 10%, and closing more money-losing branches.

Ofer Vaknin