Blue Square Co-op Expected to Auction Off IKEA Stake

Blue Square Consumer Cooperative Society (Co-op) is likely to auction off its stake in the local franchise of the Swedish furniture franchise IKEA, according to sources close to the cooperative.

It is estimated that Co-op will take bids if it fails to reach an agreement under which IKEA Israel's parent company and Canadian businessman Albert Gnat's heirs would buy the Co-op shares at market value.

Co-op owns 75 percent of IKEA Israel, while the recently-deceased Gnat held the other 25 percent. Gnat served as a director at the parent IKEA company, which transfered its holdings in the local franchise to a Gnat-controled company in early 2002. Apparently Gnat himself held between 5 and 10 percent, while the remainder is in trust for IKEA.

Co-op and its steering committee, which includes attorney Lipa Meir, David Brodet and former state comptroller justice Miriam Ben-Porat, are court-mandated to sell the cooperative's assets in order to distribute the money to the cooperative society members.

The cooperative apparently prefers a court-managed tender similar to the one that led to the sale of Blue Square Israel to the Bronfman-Alon group last year. However, the sale of the IKEA stake is problematic for two reasons: Gnat's company holds a right of first refusal on any sale, and the parent IKEA holds the right to vet any buyer taking control of IKEA.

Co-op's steering committee, Gnat and IKEA held extended negotiations over the past year regarding Gnat's 75 percent purchase, invoking the right of first refusal. The committee apparently believed this would be the only sale the court would allow without a tender process. However, the parties could not agree on a value for IKEA Israel.

The Kesselman and Kesselman accounting firm made a $22 million valuation of the local furniture franchise on behalf of Co-op, while the Ziv Haft accounting firm made a $19.8 million valuation of the Israeli operation on behalf of IKEA.

The valuations were prepared based on 2002 financial results, and therefore, did not include the company's substantially-improved performance last year.

IKEA Israel posted NIS 323 million in sales in 2003, a 6 percent increase over the previous year. The company's operating profit increased by more than 20 percent to NIS 50 million last year. Co-op is likely to seek an updated valuation given the better figures.

Sources close to the parent IKEA said the company opposes any adjustments to the valuation.

Talks on the potential sale were halted upon Gnat's recent death in Australia. His heirs are expected to comment at the end of the mourning period. Should the heirs not be interested in the acquisition and IKEA does not buy the Co-op stake, then the steering committee is expected to publish a public tender for the shares.

This type of tender is problematic, since IKEA is privately-held and the parent company is expected to refuse revealing detailed financials. Potential buyers are likely to need early approval-in-principle from IKEA before bidding.

Sources close to the parent company assert that Co-op's job is to locate a single potential candidate with whom the parent company will negotiate. Co-op sources said they would find it difficult explaining to the court why they did not hold a public tender that would maximize income for society members.

Sources close to Co-op said the company has received more than 10 inquiries, but potential buyers will have to wait until the tender is published. No negotiations are currently being held with any group.

Meir said in response: "The norm for the sale of assets is through a tender and according to instructions from the court."