The day after Tao Tsuot Ltd. (TASE: TAO-M), controlled by Ilan Ben-Dov, announced its debt settlement proposal, it turns out that the Israel Securities Authority had ordered the company to publish a revised projected cash flow report and a profit warning.
Tao had planned a bond buyback and exchange, and in early June asked the Securities Authority to approve a draft prospectus for the proposed deal. When the Securities Authority saw that Tao would likely have a deficit of hundreds of millions of shekels in 2013, and it would not be able to service its NIS 361 million debt to bondholders (payable in annual installments each September), it ordered the company to publish a revised projected cash flow report through the third quarter of 2013, together with a revised financial report for the first quarter of 2011. It also demanded Tao to attach a going concern warning to the financial report, because it lacked the resources to repay its bond debt.
In response, Tao today published a revised prospectus and first quarter financial report, which included the projected cash flow report. It states that the company forecasts NIS 15.2 million cash flow by March 2013, but that it will have a shareholders' equity deficit of NIS 452 million in September, mainly due to the bond repayment. Excluding payment for the bonds personally held by Ben-Dov, the deficit is projected to be NIS 321 million.
Tao was supposed to publish the revised prospectus and first quarter financial report last week, but decided to freeze the proposal for a buyback and exchange, under which it would offer holders of its Series 2 Bond a new bond, shares, warrants and cash. Instead, Tao would offer holders of 2 and 3 bonds to convert their to equity in Tao, which would become the controlling shareholder in Suny Electronics Ltd. (TASE: SUNY), through which Ben-Dov controls Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR).
Tao said, "On the basis of the projected cash flow, there is a substantial surplus of the company's uses over its sources at the end of the third quarter of 2013, without taking into account business developments that are not part of the company's regular operations." It added, "In view of the examination of the company's ability to meet its commitments in the foreseeable future for a period in excess of two years from the date of the approval of this report, there is great doubt about the company's existence as a going concern."
In yesterday's proposed debt settlement, Tao offered its bondholders, whom it owes NIS 423 million (not including interest and linkage), Ben-Dov will transfer his 55% controlling interest in Suny in exchange for equity in Tao. The bondholders will convert their Series 2 and 3 bonds for shares, giving them 24% of the company. Ben-Dov's stake in Tao will rise from 70% to 75%, but the 27.8% of the company held by other shareholders will be diluted to just 1%.
Tao's stake in Suny will rise from 7.4% to 63%, assuming the bondholders agree to the deal. Suny owns 5.5% of Partner, both directly and through Scailex Corporation (TASE: SCIX; Pink Sheets:SCIXF), and, through Scailex, it has exposure to the import of Samsung mobile devices businss.
The proposed debt settlement will mean a large haircut for Tao's bondholders. Tao lost a cumulative NIS 730 million in 2008-10, mostly on real estate investments, it has a shareholders' equity deficit of NIS 357 million.
Tao's share price fell 9.9% today to NIS 0.136, giving a market cap of NIS 47 million, after rising 18% yesterday.
Published by Globes [online], Israel business news - www.globes-online.com - on July 13, 2011
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