Alon Holdings Blue Square - Israel Ltd. (NYSE: BSI; TASE: BSI), the parent company of the Mega retail chain, withdrew a NIS 100 million dividend from the chain in 2013, even though Mega lost NIS 130 million that year, "Globes" has discovered. Because Mega is a private company fully owned by Alon Holdings Blue Square, neither the dividend nor the chain's enormous losses were published in the parent company's financial statements, and were also concealed from the chain's creditors, including its suppliers, to which it owes NIS 700 million. The dividend from Mega gives rise to some difficult questions, since it is clear that a chain with such heavy
"Globes" has also learned that Mega's reports for 2014 included a NIS 155 million debt to the chain by Alon Holdings Blue Square, Mega's parent company, created by coupons used in the chain. At a time when Alon Holdings Blue Square was selling the group's coupons, most of the coupons were used at the Mega chain, and it seems that there was a delay in transferring money to the chain for the use of the coupons. Sources in the Alon Holdings Blue Square group assert that the parent company has since paid the debt. The court petition for a creditors' meeting and debt settlement filed this week by the Mega chain indicates that the chain's losses from 2011 through the first quarter of 2015 totaled NIS 762 million, and the chain had negative equity of NIS 44.5 million. The figures for Mega's losses did not appear in the reports by the parent company, which reported much smaller losses in the "supermarket sector," and an aggregate profit of NIS 290 million for the period. In other words, there is a NIS 1 billion discrepancy.
For example, while the chain lost NIS 436 million in 2014, the supermarket sector losses reported by Alon Holdings Blue Square for that year amounted to a mere NIS 44 million. The previous year (2013), Alon Holdings Blue Square reported a NIS 44 million profit in the supermarket sector, while according to the request for a stay of proceedings, Mega lost NIS 130 million that year. The trend in the first quarter of 2015 was similar, with the parent company reporting a NIS 31 million loss from the supermarket sector in its financial statements, compared with an NIS 87 million loss reported in Mega's court petition - almost three times as much.
Despite the dramatic discrepancies between Mega's actual losses and the figures disclosed in the parent company's reports, it does not appear that Alon Holdings Blue Square broke the law, but rather exploited its status as a company listed on stock exchanges in both Israel and the US. Dual listing in Israel and overseas enables a company to do its financial reporting according to requirements of the foreign stock exchange on which it is listed, and Alon Holdings Blue Square therefore benefitted from the option of not reporting Mega's financial results, which it would not have enjoyed, had it been listed only on the Tel Aviv Stock Exchange (TASE).
Sources in the Alon Holdings Blue Square group blamed David Wiessman, until recently CEO of Alon Holdings Blue Square and one of its controlling shareholders (together with Shraga Biran and the kibbutzim), for the huge losses and debts discovered in Mega. The sources termed it "Wiessman's accounting tricks - what was done was legal, but despicable." A severe dispute broke out between Biran and Wiessman last year, with Wiessman being ousted as CEO of the main Alon Holdings Blue Square companies in early 2015. Wiessman still holds a minority stake in the group. Mega's profile, revealed in all its ugliness in the chain's petition to the court for protection against its creditors, provides a rare opportunity to learn about the wonders of financial reporting.
As a fully owned subsidiary of Alon Holdings Blue Square, Mega is not obligated to publish its financial results. Up until now, the public has had to settle for reports by the parent company for its "supermarkets sector." The sector report attached to Alon Holdings Blue Square's 2014 financial statements listed a NIS 38 million profit on the supermarkets' activity, together with a NIS 70 million loss on branches whose activity it was decided to discontinue. On the other hand, a reader of the annual report by Alon Holdings Blue Square to the US Securities and Exchange Commission was given a completely different impression. This report said that Mega had posted a NIS 277 million loss on Mega's business, plus an additional annual loss from elimination of a NIS 132 million tax asset - in other words, a total loss of NIS 410 million. As reported to the court, Mega's 2014 loss grew to NIS 436 million.
The court petition did not specify how much of this loss was an operating loss, and how much resulted from one-time accounting write-offs, which do not indicate the chain's current performance. The feeling is that as long as Alon Holdings Blue Square wanted to give the impression that everything was fine, it reported a better picture of the business. Now that it wants concessions from its creditors, the true picture at Mega is being revealed.
Published by Globes [online], Israel business news - www.globes-online.com - on July 1, 2015
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