CVC Capital Partners, a Luxembourg-based private equity fund, is in advanced talks to buy a 40% stake in Super-Pharm in a deal that values Israel’s biggest drugstore chain at about 1.9 billion shekels ($540 million).
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The potential sale comes as the 283-store chain faces challenges at home, with grocery chain Super-Sol acquiring rival New Pharm, and seeks to improve on a lackluster overseas expansion.
“Behind the attempt to enlist an international partner is the aim of expanding abroad, at the least with more stores in China and to try to add more stores in Poland and enter new countries,” said a source close to the talks. “Until now, Super-Pharm has acted alone and is competing in states where it faces global giants. It’s time to bring in a big partner that can provide capital and overseas connections.”
Formed in 1981, CVC invests on behalf of over 300 investors and has cash commitments from them of about $71 billion. Last week CVC added to its portfolio a portion of the global women’s health business of Teva Pharmaceuticals, for which it paid $703 million in cash.
In mid-September it was reported that the U.S. private equity fund Blackstone and an unnamed European drugstore chain sought to buy Super-Pharm.
Under the terms being discussed, CVC would buy a fifth of the 75% stake owned by Leon Koffler, scion of the Canadian family that founded Shoppers Drug Mart, who founded Super-Pharm in the 1970s. Bank Leumi and Israel Discount Bank will sell their entire combined 25% stake.
Unlike the banks, CVC will be a controlling shareholder in Super-Pharm, with significant representation on its board. The banks will sell their shares at a small discount to Koffler’s shares, partly because they will share in a 150 million shekel dividend that will be issued before the sale is completed and partly to reflect the control premium CVC will enjoy.
Sources said the banks want to exit Super-Pharm out of concern that its market dominance is about to be tested by Super-Sol and doubts about an overseas expansion drive.
Super-Pharm had fought to block Super-Sol, Israel’s biggest food retailer, from buying the 65-store New Pharm chain, but two weeks ago the Antitrust Authority approved the sale, conditional on the sale of nine stores. For Super Pharm it was a double blow, clearing the way for a powerful new rival and creating a potential third competitor after discount grocery chain Rami Levy expressed interested in buying the nine outlets and entering the segment.
Meanwhile, drugstores have come under fire from Economy and Industry Minister Eli Cohen. In the wake of a study by his ministry, Cohen in July called on Super-Pharm executives to explain why its prices for toiletries and personal care products are so much higher than the supermarkets’ prices.
Meanwhile, a Finance Ministry study found the drugstore segment to be among the least competitive in Israel and that business concentration had grown worse between 2010 and 2015. It claimed that drugstore profit margins, which reached 4.3% in 2015, were the highest in the retail industry, though not as high as those of toiletry importers. Super-Pharm termed the treasury figures incorrect.
In Poland, where Super-Pharm operates 74 stores, it is contending with a new law that bars existing international chains from adding outlets and new entrants from opening more than four stores. Super-Pharm has been rushing to add outlets for the law goes into effect. In China, it operates 10 stores.
Bank Leumi, which controls its Super-Pharm shares through its Leumi Partners unit, bought its 15% stake in 2007. It will probably earn a pretax profit on the sale of its stock of as much as 80 million shekels, on top of the 100 million shekels in dividends that it has earned over the years. Discount Bank, which bought its 10.4% stake in 2010, will record a pretax profit of up to 30 million shekels.
Super-Pharm had global sales of 5.35 billion shekels in 2015, the last year for which figures were available, of which 4.5 billion shekels came from Israel. It is estimated to have had earnings before interest, taxes, depreciation and amortization of more than 350 million shekels that year and a net profit of about 140 million shekels.