May 3, 2022
Shufersal operates a chain of supermarkets under the Shufersal brand name in Israel. It has a market capitalization of $2,157 million, operates a network of 305 stores plus 90 Be stores that specialize in cosmetics and pharma products, an annual turnover of about $4.4 bil (21% market share of Israeli food retail market, has a net debt of $421 mil, an Enterprise Value of $2,578 mil and currently trades at an EV/EBITDA valuation multiple of x7.86.
Recently few interesting developments took place, and we believe it is currently a major turning point in company’s story and its shares represent an attractive investment opportunity, can become an activist investors target or even a buyout is possible.
On March 15th, 2022, company reported that it received a proposal to acquire 24.9% of company for 28 NIS per share or a total investment of 2,464 NIS mil. This offer was subsequently withdrawn due to the fact that offer was made by the former owners of Freshmarket chain (which was acquired and merged with Paz Oil Company) who are binded by certain non-compete agreements.
On March 30th, 2022, Carasso Motors disclosed that it is at the initial stages of reviewing the possibility of making a major investment in Shufersal (Carasso Motors according to the disclosure is not a shareholder).
On April 6th, 2022, company disclosed that it received a merger proposal from Delek Israel under which Delek Israel will be acquired by Shufersal in exchange for issuing new shares of Shufersal so that Delek Israel will own 10% of Shufersal, and payment by Delek Israel of 100 million NIS in return for addition Shufersal shares and options to increase the holding at the same price the merger transaction would be done so that in the future Delek Israel could own 19.99% of Shufersal (if all options would be exercised).
According to media reports in November of 2021, Delek Israel was preparing for IPO. Delek Israel operates a network of 240 gas stations, 200 convenience stores under the brand name Menta and a network of 55 cafes under the name Coffee Joe.
This proposal was subsequently turned down by the company on April 13th, 2022..
On April 11th, 2022, company disclosed that it received a proposal from certain investment funds to make an investment of 540 NIS mil in exchange for 15% of Shufersal’s real estate subsidiary (that includes stores rented to Shufersal itself for supermarket branches as well as additional income producing real estate). The offer also included certain requirements: to engage with these funds as management advisors, public listing of real estate company and bonus payment related to real estate company’s share price performance over 5 years.
This offer reflects a real estate company’s valuation of 3,060 NIS mil which currently represents 42% of Shufersal’s current market capitalization.
Also on April 11th, 2022, company disclosed that it received an expression of interest from Amot Investments Ltd (publicly traded) to receive information about real estate owned by Shufersal and review possibilities for making an investment into Shufersal’s real estate subsidiary and form a long-term partnership.
What all this means for investors?
We think that recent developments represent a major turning point in Shufersal’s story.
Assuming that company will proceed in one way or the other to separate real estate subsidiary, list the shares and distribute them as spin-off to Shufersal shareholders, such a transaction could unlock a lot of value for shareholders.
First, taking the value mentioned above of 3,060 NIS million, Shufersal shareholders will own shares in new subsidiary that could be worth 11.33 NIS per Shufersal share (current market price is 26.90 NIS per share). The separation will unlock a lot of shareholders value and we believe (together with certain additional conservative assumptions) that on a combined basis Shufersal shares could provide an upside of 58% percent over next three years.
What is interesting is that if the shareholders will receive the shares of newly listed company in a spin-off, the market capitalization and share price will be “adjusted” for the (above mentioned) 42% percent.
So, on a post-separation basis, Shufersal shares could provide an even larger upside of 100% from post-separation estimated share price.
Recent events certainly indicate that Shufersal’s story is warming up and its shares represent an interesting investment opportunity that has the best of both worlds – event-driven situation and value-oriented valuation.