Supermarket Chain Mega Seeks Protection From Creditors

The step comes after failing to obtain an agreement with suppliers postponing a payment due last week.

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A Mega superstore in Tel Aviv, July 2015.
A Mega superstore in Tel Aviv, July 2015.Credit: Ofer Vaknin

Mega, once Israel’s second-largest supermarket chain, on Sunday abandoned efforts to keep creditors at bay and find a buyer and instead asked for court protection from its creditors.

As lawyers recounted the troubles the embattled food retailer had suffered over recent months, workers protested outside Lod District Court and called a strike that will shutter the chain’s stores Monday.

“I raised my family in this company,” said Meir Sabag, 50, who said he had worked at Mega and its predecessor business for 31 years in its fresh produce warehouse. “This is the darkest of days. I could wake up tomorrow and find myself without a living,” he added.

Unions said Mega’s 3,500 employees would rally outside the court Monday, where Judge Ilan Shiloh will weigh the company’s petition to get 60 days’ respite from creditors and to appoint a receiver. He granted a temporary stay on Sunday for up to 48 hours.

The petition said Mega owed 477 million shekels ($120.9 million) to suppliers, another 494 million shekels to banks, 257 million shekels to its parent company, and 62 million shekels to employees.

Once the top rival to Supersol, Mega is now down to 127 stores, many of them Mega in the City outlets located in residential areas and some of its Zol B’Shefa chain geared to the ultra-Orthodox market.

An analysis of cash flows detailed in Sunday’s court petition suggested that Mega’s turnover has been running at an annualized rate of 1.9 billion shekels, which would make it half the size of discount supermarket chain Rami Levy.

Mega’s attorneys blamed food manufacturers and importers, as well as the media, for the food retailer’s failure to get back on its feet after previously reaching a court-sanctioned debt agreement with suppliers and unions. Suppliers cut back or cut off deliveries, and/or demanded cash in advance.

“There is not a single retail chain that could operate by paying for purchases in cash – certainly not Mega,” the petition said. “Under the circumstances, and after a major effort last week didn’t succeed in convincing suppliers to change their attitudes, the board concluded it had no choice but to file this petition.”

Unions, as well as many of Mega’s suppliers and potential buyers of the business, are demanding that Alon Blue Square’s controlling shareholders inject capital in the Mega chain to keep it afloat.

Mega’s workers’ committee, which received a 33% stake in the chain as part of the July agreement, demanded that both Shraga Biran and the kibbutz purchasing organization that control Alon Blue Square put in 60 million shekels to stabilize operations.

“Even if a receiver is appointed by the court, he will need to operate the company and purchase inventory. We need the backing of the owners,” said Eyal Eli, chairman of the Mega workers’ committee.

In spite of the chain’s troubles, a visit to the Mega supermarket on Tel Aviv’s Ibn Gabirol Street Sunday found customers browsing the aisles and most shelves stocked – although on closer inspection many popular items were missing, their absence masked by careful product placement.

Customers expressed sympathy with employees. “I’ve been shopping here for years, and there’s a great team of workers here,” said one shopper who asked not to be named, adding, “I hope they buy the place with the full staff.”

Alon Blue Square had been hoping to divest the last of the Mega business. Over the last several days, it held intensive talks with two possible buyers: Yenot Bitan, a small discount supermarket chain; and an investment group led by Yossi Sagol, whose family controls Keter Plastics, and Eran Meital, a former Delek Real Estate CEO.

But talks hit a logjam on the issues of high labor costs, the high rents Mega pays on many of its stores to sister company Blue Square Real Estate, and buyers’ demands that creditors agree to forgive further debt.

Even after Mega employees took a sharp pay cut last July, their salaries are still, on average, 2,000 shekels a month more than the industry norm. However, because they have seats on the Mega board, the unions are in a position to block any further reductions.

Mega said in Sunday’s court petition that its business had begun to stabilize after the July bailout, which cut its debt by 30% and enabled it to close 32 loss-making outlets and lay off more than 1,000 employees.

It asserted that through the High Holy Days in September, it was able to stock shelves, even though suppliers were refusing to give it the same credit terms as before the bailout. “Not a day has passed since the debt agreement in which Mega wasn’t struggling to fill its shelves with merchandise,” the petition said.

The High Holy Days were a watershed period, after which suppliers began toughening terms and Mega was forced to sell its You discount supermarket chain quickly to raise cash. The petition said the sale didn’t ease suppliers’ concerns, and the chain suffered from repeated media leaks about troubles sourcing products for its stores.

With reporting by Yoram Gabison and Hadar Kane.

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