Poalim Sahar Ltd. today advices institutional investors to reject a $575 million capital injection into Zim Integrated Shipping Services Ltd. by Israel Corporation (TASE: ILCO) as part of Zim's debt settlement.
Poalim Sahar said, "From the point of Israel Corp.'s shareholders, the internal rate of return (IRR) on the proposed investment in Israel Corp. in Zim is fairly low, and does not compensate for the level of risk inherent in the investment. We believe that without a general recovery plan, Zim cannot survive as a going concern."
Poalim Sahar considers the capital injection as tantamount to fresh investment in Zim, and questions the feasibility of the investment. The broker's model values Israel Corp.'s holding in Zim in 2013 at between $600 million and $1.1 billion, giving an average return on the $575 million investment of 13.7%.
Poalim Sahar said, "In view of Zim's delicate financial condition… we estimate the necessary return on shareholders' equity at 18%." Since it estimates the IRR at 13.7%, it opposes the capital injection, because it does not pay in terms of risk/reward.
Israel Corp. said in response, "Poalim Sahar's recommendation this morning creates an existential risk for Israel's national shipping company, and it is liable to torpedo the settlement to save the company. Poalim Sahar made life easy for itself by not looking at the big picture; its recommendation to reject the settlement is based on weak arguments.
"Astonishingly, the report contradicts the calculation and conclusions that led Israel Corp. to invest in and save Zim. The report's conclusions also contradict Poalim Sahar's explicit statement of an expected return of 14%, which is a good return by any measure, certainly in the emergency conditions and jeopardy that Zim is in."
Israel Corp. added, "This recommendation, if adopted, will have weighty and far-reaching economic and security implications that will lead to the loss of thousands of jobs, directly and indirectly among Zim's service providers."
Earlier this month, shipping trade magazine, "Trade Winds" reported that both Hyundai Heavy Industries Co. Ltd. (KSX: 9540) and Samsung Heavy Industries Co. Ltd. (KSX: 10140) denied that they had agreed to Zim's request to delay deliveries of ships ordered from 2010 to 2014-15. Israel Corp. had announced an understanding to this effect last month. Postponing delivery of the 14 ships would have saved Zim $2 billion in outlays, greatly easing its cash flow.
Israel Corp.'s share fell 1% by midday to NIS 2,582.
Published by Globes [online], Israel business news - www.globes-online.com - on October 29, 2009
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