Nestle's Osem seen vulnerable to new food law

JERUSALEM: Osem Investments Ltd. (OSEM), the Nestle SA-owned foodmaker that sells 85 percent of its products in Israel, stands to lose the most from rules designed to spur competition.

Israeli authorities are phasing in measures to ease regulations on food imports, and as of Jan. 15, new rules may limit the ability of large local foodmakers such as Osem to wield influence over retailers, according to I.B.I. - Israel Brokerage & Investments Ltd and Bank Leumi Le-Israel Ltd. Shares of Osem, which does more business in Israel than competitors, have declined 4 percent this month. The TA-100 Index gained 0.6 percent in the same period.

The rules, which prohibit large suppliers from offering bonuses or quantity discounts to retailers, are part of a push to slow gains in food prices that have outpaced wages over the past decade. Politicians such as former Finance Minister Yair Lapid have made the debate about the cost of living a key part of their campaigns before the March 17 general election. "The regulation focuses on strengthening the small- and medium-sized suppliers at the expense of the very large ones, and in practical terms, targets Osem directly," said Dorin Palas, an analyst at Tel Aviv-based I.B.I. who downgraded the stock to a reduce from neutral last week.

Shares of Osem, the country's second-largest publicly traded foodmaker, tumbled 18 percent in 2014, the biggest annual decline since 2005. The company, based in the Israeli town of Shoham, didn't immediately respond to telephone and e-mailed requests for comment.

The rules that go into effect this week have their roots in a summer of cost-of-living protests that brought hundreds of thousands of people into the streets in 2011. Food prices rose 38 percent between 2005 and 2014, while wage increases have trailed at 27 percent, according to government data. Food accounts for almost 17 percent of Israeli household spending. Under the new changes, retailers must limit the shelf space devoted to the largest foodmakers' products. Suppliers will be prohibited from dictating retail prices, selling products below cost and making the sale of one product contingent on a retailer's purchase of another. They'll also be barred from pressuring retailers to shun the competition.

"It's going to be a big change," said Iris Achmon, an antitrust attorney who will be joining Tel Aviv-based Herzog, Fox & Neeman next month. "I don't think this has been tried to this extent anywhere, this level of intrusiveness." Strauss Group Ltd. (STRS), the biggest publicly traded foodmaker, which focuses on the domestic market less than Osem, is unlikely to suffer as much as the Nestle unit, analysts said.

Shares of Neto ME Holdings Ltd. (NTO), a smaller food company that Palas says may benefit from the change, advanced 6.8 percent this year. As supermarkets seek to widen selection and improve their bargaining power against large suppliers, they may commission more lower-priced store brands from smaller foodmakers, she said.