Rami Levi Calls Reports on Talks Mega Deal Premature

Nevertheless, shares of the supermarket chain closed up 3.8% to NIS 114.10 on Tuesday and reached as high as NIS 115.90 during the trading day.

Rami Levi-Shivuk Hashikma on Tuesday denied news reports that it was conducting negotiations with Alon Blue Square to acquire 53 Mega supermarkets - a clarification that did little, however, to dampen investor enthusiasm for a possible deal.

In a statement to the Tel Aviv Stock Exchange, Rami Levi said the two sides had held nothing more than preliminary contacts on the matter. Nevertheless, shares of the supermarket chain closed up 3.8% to NIS 114.10 on Tuesday and reached as high as NIS 115.90 during the trading day. Alon Blue Square shares ended 1.2% higher at NIS 8.63.

The talks, first reported on Tuesday, would nearly triple Rami Levi's network, which now counts 24 outlets. David Weissman's Alon Holdings Blue Square Israel, which owns Mega, operates over 200 stores.

Most of the 53 outlets in question operate under the chain's 70-unit Mega Bool discount brand and might mark the end of the chain's presence in that market segment. Reports said the two sides were seeking anti-trust approval to go ahead with the deal.

Anti-trust authorities on Tuesday deklcined to comment on the matter.

Excellence Nessuah analyst Liat Glazer, who assigned a NIS 150 target price to Rami Levi shares, said the transaction was by no means a fait accompli.

"We don't see a deal with Alon Blue Square being completed under the terms that have been described," she said. "Nevertheless, the logic of the deal struc

tured differently is reasonable and positive. There is no doubt that the retail sector will be undergoing changes in the next few years. Rami Levi is moving in the right direction and growth in revenues will yield operating profits."

For a small retailer like Rami Levi, however, acquiring 40 to 50 branches all at once is problematic. The value of the added outlets depends on the company's ability to cut costs and increase sales.

"The ability of existing headquarters staff to take on so many additional branches at one time is likely to end in failure," Glazer said. "There is also the issue of cannibalization."

She said acquiring 15 or 25 branches would be challenging as well but more practical, meeting the company's target of 50 branches under its management by 2013.

Operating profit will probably come under pressure in the short term, but the acquisition only looks bad if Rami Levi's operating margin falls below 2.6%, Glazer said.

Industry sources speculated that the two sides were considering arrangements less than a full sale. One would transfer management to Rami Levi, which would oeprate the stores under the Rami Levi name and share profits with Alon Blue Square. Another is that the two sides would set up a joint venture to operate the branches under Rami Levi's management.