The District Court may have approved the debt arrangement in supermarket chain Mega this week, but the shareholders and bondholders of parent company Alon Blue Square are far from being happy with the situation. The hit to the shareholders is liable to be dramatic, given the severe dilution they will sustain in the arrangement, while the bondholders are starting to fear the possibility that company will have difficulties in paying its debt to them on time.
There was no new development in the company's situation today, but it looks as though the investment community has started to assimilate the implications of the debt arrangement in Mega. Alon Blue Square's share price fell by more than 20% sharply today, and is down 51% since the beginning of the year.
Israel's second biggest retail chain is now traded at a market cap of just NIS 330 million, NIS 360 million having been wiped off its value this year. At the same time, its series C bonds have lost 2%, giving them an annual yield to redemption of 9.2%.
This morning, Alon Blue Square announced its intention of convening a bondholders meeting in a week's time. It owes the bondholders NIS 385 million. At the meeting, company CEO Avigdor Kaplan will report on its business situation and its ability to meet its commitments on time. After that, the bondholders will hold their own discussion on the steps they will take to ensure payment of the debt.
At present, however, the bondholders' scope for action is limited, since the company has not been declared insolvent, does not carry a going concern qualification to its accounts, and has not requested any postponement of its debt payments.
This situation could change with the release of the second quarter financial statements, when the auditors will have to give serious consideration to the question whether Mega's goodwill is really worth NIS 158 million, as stated in the 2014 year-end statements. The supermarket chain's worsening losses are liable to cut even further into the parent company's shareholders' equity, which stood at NIS 665 million at the end of the first quarter.
As part of the debt arrangement in Mega, Alon Blue Square announced its intention of raising NIS 150 million in a rights issue, with its controlling shareholder, the privately-held Alon Group, undertaking to exercise its portion of the rights. The holding company thus assured itself of a cash injection of at least NIS 109 million in the issue, while its payments to its bondholders amount to some NIS 50 million annually. The bondholders, however, are still concerned, because of the need to continue supporting the Mega chain, and because of the lack of options for recycling debt at present.
Apart from its full ownership of Mega, Alon Blue Square also holds 61% of Blue Square Real Estate, worth NIS 860 million, 71% of the Dor-Alon fuel station chain, worth NIS 350 million, 78% of homeware company Naaman, worth NIS 40 million, and 37% of credit card company Diners, worth an estimated NIS 180 million. Altogether, these assets amount to NIS 1.43 billion. At the same time, the company has debts to bondholders, as mentioned, and also to the banks. Rating company Midroog estimates Alon Blue Square's solo debt at NIS 700 million.
In addition, as part of the arrangement, Alon Blue Square undertook to inject NIS 320 million into Mega, and also provided a NIS 470 million guarantee for the supermarket chain's commitments.
In order to finance Mega's continuing losses, in the past two years Alon Blue Square has sold Blue Square Real Estate shares to the tune of NIS 361 million. But the urgent need for cash to meet its new commitments will mean that it will have to sell off assets. Midroog estimates that in the coming months it will sell another 10% of Blue Square Real Estate, worth NIS 140 million.
It is not inconceivable, however, that at the same time Kaplan will put the holdings in Diners and Naaman up for sale, and even expand the sale of shares in Blue Square Real Estate by a further 5%. Such a sale would reduce the holding in Blue Square Real Estate to just 46%, but that would still leave de facto control of the subsidiary in Alon Blue Square's hands.
On the face of it, the holding in Dor-Alon could also be for sale, but given the meagre interest shown in rival chains Solo and Ten, which have both been for sale for some time, it's hard to see a buyer for Dor-Alon coming along in the near future.
If these moves come off, that will to some extent reassure the bondholders, but only if Mega's situation improves. Otherwise, it will continue to be a drain on the group's cash and will impair its financial strength.
Last week, Midroog cut Alon Blue Square's rating to Baa3, and remarked on its weak liquidity.
Alon Blue Square's shareholders will have to contend with asset sales under pressure without any substantial premium, and with a dilution that could be substantial if part of Mega's debt to suppliers is converted into shares in the parent company, as was proposed to them under the debt arrangement.
Plans versus reality at Eden Teva Market
Last week, the court approved a request for a stay of proceedings filed by the Eden Teva Market health food chain, and appointed a trustee. The chain, 51% owned by Mega, turned to the court after getting into a severe crisis and being unable to meet its commitments.
It is therefore surprising to discover that a little over two months previously, Eden Teva Market's management and board of directors still believed in its ability to withstand the crisis. In Alon Blue Square's 2014 annual report, published on April 30, Eden Teva Market's auditors, Barzily & Co., drew attention to the deficits on shareholders' equity and working capital at Eden Teva Market and to the plans of the management and board to deal with them.
"The company's board of directors and its management take the view that, given the forecast cash flow - which includes, among other things, forecast asset sales, consolidation of frameworks and prevention of overlaps with the parent company, other streamlining measures, and cash injections from other sources - the company has sufficient sources of funds to pay its commitments and continue its activity," the auditors wrote.
Two months later, it turns out that plans are one thing, and reality another.
Published by Globes [online], Israel business news - www.globes-online.com - on July 16, 2015
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