Sources inform ''Globes'' that Alon Israel Oil Company Ltd. is in talks to sell the Mega, Teva Eden Market, and AM:PM supermarket chains, held through Alon Holdings Blue Square - Israel Ltd. (NYSE: BSI; TASE: BSI), to Catterton Partners, a US private equity fund that specializes in retail chains.
Catterton Partners operating partner Marc-David Bismuth is handling the negotiations. Before joining the firm in 2005, he was President of Danone Naya Waters North America, where he played a key role in the formation of the joint ventures with The Coca-Cola Company (NYSE: KO), and before that, he was an executive at France's Carrefour Group SA (Euronext: CA).
The sources added that France's Auchan Group SA, Europe's second largest supermarket chain, is expected to join the deal, and that its representatives toured Mega stores with Mega Retail CEO Motti Keren. At a conference the day before the tour, Keren unexpectedly said, "The Israeli market is too small and complex for a global player to enter it. They say that we're thieves, and that you'd have to be nuts to enter this market."
Under the pending proposal, Catterton Partners will acquire 55% of the supermarket chains at a value of NIS 1 billion, including Mega's debts, which are estimated at several hundred million shekels. In Israel, Bismuth met Alon Group chairman David Wiessman and Shraga Biran, his partner in the company's ownership, and toured Mega, Teva Eden Market, and AM:PM stores. The parties have also held meetings in the US, the most recent of which was last week. Bismuth is due to make another visit to Israel later this month.
Mega is Israel's second largest supermarket, after Shufersal Ltd. (TASE:SAE). It has 213 branches, 130 of which are neighborhood supermarkets under the Mega Ba'Ir format, 66 are discount stores under the Mega Bull format, and 15 are Zol Beshefa stores, a discount label for the haredi (ultra-orthodox) community.
Mega Retail owns 51% of the health food chain Eden Teva Market, with the rest held by its founder and CEO Guy Provisor. Eden Teva Market has 21 stores, nine of which operate within Mega supermarkets. Alon Holdings owns AM:PM through Dor Alon Energy in Israel (1988) Ltd. (TASE:DRAL), after acquiring the supermarket chain in 2007.
Mega has been struggling for years from shrinking sales. The downturn began in March 2008, when haredim declared a boycott of Shefa Shuk, following Alon Group's acquisition of AM:PM, which is open on the Sabbath. Shefa Shuk lost hundreds of millions of shekels in sales a year, and Mega has been struggling with the fallout from the boycott. It gradually converted most Shefa Shuk stores to Mega Bull stores, which only worsened the business results. Mega has also been hit by competition from independent chains, led by Rami Levy Chain Stores Hashikma Marketing 2006 Ltd. (TASE:RMLI).
Although Mega remained strong in the neighborhood segment, with Mega Ba'Ir, and Eden Teva Market's differentiation has helped, the company has struggled in the discount segment. As "Globes" reported, Alon Group's talks to sell 40 Mega Bull supermarkets to Rami Levy failed to result in a deal.
Mega had NIS 3.22 billion revenue in the first half of 2013, down 1.7% on the first half of 2012. The drop in sales was partly due to the closing of nine loss-making supermarkets, which were sold to competitors as part of the company's strategy. The company's use of discounts to deal with competition reduced its gross profit margin from 26.9% in the first half of 2012 to 25.4% in the first half of 2013, for a gross profit of NIS 817.8 million.
Mega's operating profit fell 83% to NIS 8 million in the first half from NIS 42.8 million in the corresponding half, resulting in a balance sheet deficit.
Earlier this year, Mega announced a new strategy, which includes reducing surplus retail space, selling loss-making supermarkets, spinning off the discount and neighborhood formats, some of which will be converted into a new format that will participate in the Alon Group's You customer club.
Keren told analysts that the new strategy aimed at bringing the company to the global benchmark operating profit level by setting three goals: increasing market share; increasing the number of customers; and improving profit margins. As part of this strategy, earlier this month, Mega Ba'Ir lowered prices on 1,000 products, but suppliers say that the plan has not yet resulted in any changes in the field.
Published by Globes [online], Israel business news - www.globes-online.com - on November 17, 2013
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