Better Place dream and Zim nightmare


Israel Corp.'s Israel Chemicals is the cash cow funding the hopes of Better Place's electric vehicle, and Zim's deepening losses.

There is a reason that Israel Corporation (TASE: ILCO) describes Shai Agassi in its financial reports as "a significant person" for Better Place. Without Shai Agassi, and his charisma, his marketing ability and persuasiveness, and his complete belief that he is on the right path - without all of this, Better Place would never have been born. The company is currently entering the most important stage in its life: the proof stage, where it needs to prove to all those who have doubts, and there are many of them, that his business model will be a huge success, just like Agassi has been promising. In order to succeed, Agassi needs as many people as possible to begin driving electric cars, and it doesn't matter which model. And he needs one more thing that is no less important: to consolidate Better Place's nascent status as a monopoly of the electric car infrastructure, that brokers between the customer and the source of electricity and the government through technological systems. This is the source of the friction between the company and the governments in countries where it is operating.

Better Place is one of the most ambitious, intriguing, and controversial projects that have been established in Israel in the last few years. Its success will not be measured by its operations in Israel, which has a small automobile market. Agassi wants to conquer the world, and Better Place's financial reports reflect this well, for better or for worse.

$2.25 billion - was Better Place's apparent market cap during its $200 million financing round last week. This is the amount that the company wrote in its press release, and which the financial media used to compare Better Place with other veteran companies in Israel in an effort to show how amazing Better Place is: in just four years since its inception, Better Place has surpassed companies like Osem Investments Ltd. (controlled by Nestle (SWX:NESN)) (TASE: OSEM), at least in terms of its market cap. When it comes to financing rounds, setting the company's value is like a game. So long as the company is private, regardless of how much money will be raised, the number is meaningless. Only when Better Place reaches the stock exchange where its market value will be decided each day by the selling and buying of its shares will the number be significant.

This reminds us of the intense high-tech and venture capital craze at the beginning of the millennium, when many start-ups would show off their rounds of shiny funding according to values that were out of this world. In the end, these companies found themselves fighting for their lives after they burned through the money, but without successfully implementing their business plan that had been the basis on which that they had raised tens of millions of dollars.

It can be assumed that Better Place will hold an IPO at some point. It can also be assumed that it will be marketed as a dream company. The market might get excited from the merchandise, which would bump up the share price in its initial days as a public company, since Better Place has shareholders like Morgan Stanley, UBS, and HSBC - powerful bodies on Wall Street that at the right time will know how to push, market and sell Better Place shares to investors as the hottest commodity in town. But at the end of the day, and Agassi knows this, convincing shareholders (during a financing round), convincing governments (to undertake the project), and convincing investors (in the first few days of an IPO) are easy compared with the task that will decide Better Place's fate: convincing consumers to use electric cars. This will be the deciding factor between the ability to make a profit and the ability to sell dreams.

$376 million - is the debt that Better Place had accumulated as of June 30, 2011 (it will surely pass the $400 million mark by the end of the year). It is also the reason for the last financing round. Better Place is a cash-gobbling company and it "needs" to continue to gobble cash until the awaited moment when consumers will begin cruising roads in electric cars and using the company's services. At this point, Better Place has no income and no customers, and it does not foresee having income until the end of 2011 at the earliest, and it is doubtful whether it will have any significant income during 2012. In the meantime, Better Place is continuing to develop and to deploy infrastructure for the electric cars, which includes charging stations for electric cars and a network of quick battery exchange points. A portion of the financing comes from third parties (like Denmark and Australia), but a larger portion comes from Better Place itself. The rate of eating up cash would have put pressure on the company's cash flow already in 2012, which led to the need to raise funds in order to refill the pot again.

$750 million - is the amount that Better Place has raised in less than four years. It is an enormous, impressive, unprecedented amount of money for an Israeli company, and one of the largest financing rounds worldwide for this type of company. This huge financing round is a combination of investors' belief in Better Place's dream, Shai Agassi's persuasiveness, and Idan Ofer's ties to financial markets. However, attention must be paid to the way the financing round was accomplished: a large part of it was done through preference shares, which is acceptable in these types of investments. Preference shares provide their owners a variety of rights, including priority in receiving a return on their investment and being privy to information. These rights can be seen in Israel Corp.'s financial reports. The debt includes an annual interest payment to preference shareholders, which amounts to $30-40 million a year in the last two years. In other words: they are receiving interest payments, though small, from the money investors are putting into the company. This is another reason, be it minor, putting pressure on Better Place to refill its cash levels.

$220 million - is the amount Israel Corp. invested in Better Place, including the last financing round, which is about 30% of the total amount raised. There is no doubt that Idan Ofer believes in Shai Agassi, completely believes in Better Place's vision, and believes and is certain that the electric car will succeed in Israel. Except that this belief turned into an investment of $220 million, mostly due to the lowest place on earth: the Dead Sea. Israel Corp., which is controlled by Ofer, has had a clear cut division of labor these last few years: Israel Chemicals Ltd. (TASE: ICL) (of which he owns 50%) has huge profits - more than $1 billion a year. It is a cash cow, has huge dividends and it creates the value and is Israel Corp.'s security buffer. All the rest, mainly the investments in the two car ventures (Better Place and Chinese electric car maker Chery-Quantum) are moving the cash in the opposite direction. Because ICL has such high yields, and has been consistently highly profitable for years, its huge amount of money also swallows investments the size of Better Place.

But there is one thing that Ofer and Israel Chemicals will have a hard time accepting in the long run: the Zim Integrated Shipping Services Ltd. mess. The media celebration of Better Place has taken precedence over the truly big story of Israel Corp. - the never ending woes and huge losses that are piling up at Zim. It appears that the crisis in the shipping industry, which hit Zim in 2009 and forced it to restructure its debt, experienced a respite in 2010, but resumed full force in 2011. Zim lost $180 million in the first half of 2011, and at the end of the month will report a black third quarter, darker than black, which could once again open it up to questions about its very existence and to trigger the need for additional support from Israel Corp. and another restructuring of its debt. If the shipping crisis does not dissipate, the $220 million that was invested in Better Place (and might be returned if the dream comes true) will be peanuts compared with the money Ofer will need in order to continue supporting Zim.

Published by Globes [online], Israel business news - - on November 20, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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