Where Did Mega’s Millions Go? Creditors Are Asking

The answer, say sources close to controlling shareholder Shraga Biran, is that the cash was poured into a raft of failed investments.

Moti Milrod

As Mega, Israel’s second-largest supermarket chain, teeters under the weight of 1.3 billion shekels ($343 million) in debt, its creditors are asking where all the profits from Mega’s best years have disappeared.

The chain's suppliers — both food makers and importers — are owed more than 700 million shekels. They want to know why they’re the ones who have to wait to get paid when, between 2006 and 2011, Alon Blue Square’s closely held parent company collected dividends worth more than twice that from the business.

Israel’s biggest supermarket chain after Super-Sol, Mega’s 1.3 billion shekels in debt is to banks as well as suppliers. Last month it reached an accord with unions for mass layoffs and branch closings aimed at slimming down the business. And last week it sought to reschedule its debts, prompting charges that its controlling shareholders weren’t contributing enough to turning the retailer around.

Unions are getting an equity stake in Mega in exchange for the layoffs and Alon Blue Square is offering creditors a debt-for-equity swap. But for now, Alon Blue Square has only offered to supply revolving credit to the supermarket chain to enable it to continue operations.

The pain at Mega worsened Thursday when a court issued an order protecting Eden Teva Market, the organic and health food chain 51%-owned by Mega, from creditors and appointed a trustee to manage the business.

In contrast to Mega’s suppliers, who have not been asked to write down any of their debt, Eden Teva Market is asking the court that it repay just 60% of its debt to suppliers over 12 payments. It would pay 75% of its debt to banks. Mega, meanwhile, is asking to buy the 49% of Eden Teva Market still controlled by its founder, Guy Provisor.

But Provisor is holding out for a high price. In a petition to the Tel Aviv District Economic Court, he asked that Mega and Alon Blue Square buy his stake for a company valuation as high as 77.6 million shekels.

Shares of Alon Blue Square, which have lost more than half their value in the past month, rose 3.3% on Thursday to 6.47 shekels.

Mega lost 762 million shekels between 2011 and the first quarter of this year, but as late as 2013, when the chain posted a 130-million-shekel loss, Alon Blue Square took a 100-million-shekel dividend. That last payout wasn’t in cash; it came in a reduction in Alon Blue Square’s debt to Mega.

Shraga Biran, whose 53% of Alon Holdings makes him Alon Blue Square’s controlling shareholder, hasn’t said a word in public about Mega’s problems since they fully emerged a month ago. But that hasn’t done anything to assure creditors.

Dividends burned

In his defense, sources close to Biran say the dividends didn’t go to Biran and other shareholders but stayed inside Alon Holdings, where they were used to invest in other businesses. Biran has taken only 21.2 million shekels in payouts over the last six years, the sources say.

“Almost all the dividends were burned up by failed investments,” said one source, adding that the trail of red ink from a series of money-losing investments was blazed by David Wiessman, the long-serving CEO who led an ambitious but flawed plan to create a retail empire. Wiessman and Biran — relatives and longtime business partners — have turned against each other as the business Wiessman built has unraveled.

At the end of last year, Wiessman was replaced as Alon Blue Square CEO by Avigdor Kaplan, who is now struggling to turn around Mega. On Thursday, Alon Blue Square said Wiessman had resigned from its board of directors, where he sat since 2003.

One money-losing investment was Bee, a group that included the housewares retailers Naaman, Vardinon and Sheshet, as well as the toy store chain Kfar Hashashuim and Dr. Baby. Together the group burned through 250 million shekels.

Alon Blue Square lost another 115 million shekels in the startup cellphone operator, YouPhone, which offered service by piggybacking on existing networks. With 80,000 subscribers, YouPhone failed to capture a major share of the market when the cellphone industry was open to competition, and last week was sold to Pelephone for a piece of future revenues. For now, Alon Blue Square isn’t seeing anything for its investment.

The AM:PM chain of 24-hour groceries, for which Alon Blue Square paid 146 million shekels for the original business and invested another 34 million expanding it, was another failed investment. It’s now on the block for 80 million, sources close to Biran say. In fact, AM:PM does considerably more damage; its stores are open on Shabbat, so ultra-Orthodox Jews boycott Mega.

Another big money loser for Alon Blue Square was Pizza Hut, which lost it 74 million shekels while 30 million was sunk into a new logistics center for Mega at Kibbutz Eyal. Mega shut it down just a little over a year after it was opened.

One of the costliest mistakes made during the Wiessman years was converting branches of the Mega Bool brand to the You discount format. Making over the stores cost the company 80 million shekels; an ad campaign for the new brand another 200 million shekels.

Mega is shuttering most of its You supermarkets under the retrenchment plan, so it’s unlikely the company will ever see a return on its investments.

The sources give Wiessman credit for a few successful strategies, notably Alon USA, the company’s energy business in the United States, and Dor Alon, its Israeli counterpart. But the returns from those businesses were eaten up by the interest costs of the 2 billion shekels in bond issues by Alon Blue Square to finance its investment program, the sources say.

With reporting by Omri Zerachovitz