Blue Square milked Mega with exorbitant rents

Mega branch photo: Eyal Yitzhar

Figures revealed by Globes show the supermarket chain paid its sister company more than 3 times the market rate.

Information seen by Globes reveals that Mega paid Blue Square Real Estate a fortune in rental fees. In several instances, the company charged the supermarket chain more than three times the market rate in the area. The rental rates were a burden on the affected Mega branches and partly dragged down the company into the red.

For its Mega in the City branch in Herzliya on Katznelson Street, Mega paid NIS 478 per square meter. The 523-square-meter branch paid rental fees of NIS 250,000 per month; the branch is in a middle income neighborhood.

Less than 5 kilometers away and only a few minutes drive is the Seven Star Mall in Herzliya, which also houses a Mega in the City branch, owned by the Israel Land Development Company. The branch is significantly larger at 2,700 square meters but pays much lower rental rates of NIS 115 per square meter with an additional management fee of NIS 29.3 per square meters. However, even with the management fee included, the rent paid by Mega on Katznelson is 3.3 higher than the mall branch.

Its outrageous, said one senior real estate source. Even in the Seven Stars Mall there isnt one 200-square-meter store that would pay such a rate.

Spin off

Blue Square Real Estate is a sister company of Mega; it is controlled (59.3%) by Alon Blue Square. The company is traded on the Tel Aviv Stock Exchange at a value of NIS 1.4 billion.

Blue Square Real Estate was spun off as a separate entity in December 2005 following a decision by the parent company though real estate was an essential part of Mega. The real estate firm was then managed by Zeev Stein.

When Mega was first hit by crisis, some of the employees accused the parent company of draining Mega of its assets during the spin off.

During the hearings on Megas first debt settlement, Alon Blue Square claimed that the parent company and sister companies could not guarantee the supermarket chains debts because they were separate entities.

However, the figures revealed by Globes show that the rental agreements signed between Mega and Blue Square Real Estate served the interests of Blue Square while hurting Mega.

According to a real estate source familiar with market prices in Herzliya, When I sell to a sister company and I want to make profit, I sell it at a premium. Each additional shekel in rent is worth much more in the appraisal of the property in accounting terms. Because the property was rented at NIS 478 per square meters, you added millions of shekels to its valuation. The revaluation is written in as a profit and increases the equity of the firm. If you want to offer debt and you raise the rental rates on properties, the value of the firm is increased. Of course, thats assuming the appraiser approves the revaluation.

Published by Globes [online], Israel business news - - on January 7, 2016

Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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Mega branch photo: Eyal Yitzhar
Mega branch photo: Eyal Yitzhar
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