Yesterday's 25% drop in the share price of Delek Group Ltd. (TASE: DLEKG), controlled by Yitzhak Tshuva, seems to have surprised investors, even as they have become inured to tumbling stock prices. The company's market cap is now NIS 2.5 billion ($660 million).
Although Delek Group's share rose 5% today to NIS 228.30, it is still down 80% from its peak. The company faces many challenges, not the least of which is how its cash cow, Delek Automotive Systems Ltd. (TASE: DLEA), will deal with the economic slowdown and a weak shekel, and how Delek Real Estate Ltd. (TASE: DLKR) will deal with softening markets. However, the biggest problem is Delek Group's high leverage at a time of crisis in credit markets. Another major problem is Israel Phoenix Assurance Ltd. (TASE: PHOE1;PHOE5).
In December 2005, Delek Group entered the financial sector by acquiring 25% of Phoenix for NIS 709 million. It subsequently acquired an additional 8% of the company for NIS 222 million, and acquired control by buying a further 28.5% for NIS 940 million in mid-2006. Altogether, Tshuva paid NIS 1.87 billion for Phoenix, which is held through Delek Capital Ltd.
Since the first investment, Phoenix has made a private placement of shares to institutional investors and distributed NIS 600 million in dividends, of which Delek Group received NIS 250 million. When small share purchases are added in, Delek Group now owns 55% of Phoenix, worth just NIS 520 million. This means that Delek Group has lost NIS 800-900 million on its investment.
This is not all. After the takeover, Phoenix went on an acquisition spree of its own. Now, with the global financial crisis at its height, the company is one of the worst hit. Its share has fallen 81% since mid-2007 and 73.6% since January. The share fell 8.4% today to NIS 3.96, giving a market cap of NIS 844 million.
In the coming months, Phoenix will probably face another heavy expense, amounting to hundreds of millions of shekels in cash, to complete its acquisition of Excellence Investments Ltd. (TASE: EXCE). Phoenix has no choice; the decision to go ahead with the deal is not in its hands alone, but also depends on Excellence's founders, chairman Ron Biram and Gil Deutsch. Their interest is the opposite of Phoenix's.
Under Biram and Deutsch's put option, which comes into effect in February 2007, they will sell their stakes in Excellence to Phoenix at better terms and at a higher price without the need for the consent by Phoenix and regardless of the latter's cash flow.
The conclusion is inescapable. Phoenix cannot finance the Excellence acquisition from its own resources and will have to raise capital. On the other hand, unlike some other TASE-listed companies, Phoenix should have no problem doing so.
Published by Globes [online], Israel business news - www.globes-online.com - on October 28, 2008
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