The story of Ilan Ben Dov and his investment in Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) is the story of the Israeli capital market over the past few years. It involves cheap and available capital at high leverage, and most of all, a faulty pricing of risk. In addition to Ben Dov, who acquired control of Partner in August 2009 putting down almost no equity, there are the financial institutions - the managers of the public's money - which financed most of the acquisition by buying the bonds that Ben Dov-controlled Scailex Corporation (TASE: SCIX; Pink Sheets:SCIXF) issued. On the sell side, Hutchison Telecommunications International Ltd. (NYSE: HTX; HKSE: 2332) provided part of the money through a generous seller's loan to Ben-Dov.
A "Globes" analysis found that Ben Dov has a paper loss of NIS 750 million on Partner.
Today, everyone is paying a heavy price for this deal. Ben Dov is rushing about to increase liquidity and meeting Scailex's huge liabilities of more than NIS 3 billion by selling strategic assets (the company's import and distribution business of Samsung handsets, and the sale of part of the controlling shares in Partner). Investment institutions are showing a lack of confidence that the NIS 2 billion owed them will be repaid, and have driven Scailex's bond yield to junk-bond status of up to 25%. As for Hutchison, media reports claim that it is about to demand immediate repaying of its loan to Ben Dov, which exceeds more than NIS 1 billion (a move that demonstrates in real time that the buyer lacks financial resources).
Ben Dov acquired control of Partner for NIS 4.7 billion, not with his own money, but through loans provided by the financial institutions that bought his bonds, the banks, and Hutchison's seller's loan. Why did they assume such a huge risk?
Part of the answer lies in awesome Excel spreadsheets that Ben Dov and his managers presented to the financiers. They showed how dividends by Partner would service Scailex's huge debts, and indirectly the debts of Scailex's parent company, Suny Electronics Ltd. (TASE: SUNY), which Ben Dov also controls.
Therefore, so long as Partner's profitability was maintained - and the mobile carrier was considered a cash cow at the time, operating in a growing market characterized by a lack of competition - and with the gradual increase in the pace of dividends, Partner's share price rose, together with the share price of Scailex.
Within a few months of the acquisition, the value of Scailex more than doubled, thanks to its huge paper profit of NIS 1 billion on its holding in Partner. The profit reflected the high leverage of the acquisition, which caused a phenomenal yield on the small equity component of the investment.
A year later, however, it turned out that the impressive numbers in Scailex's presentations existed only on paper. Heavy regulation on Israel's mobile carriers along with the pending entry of new carriers hurt Partner's profitability, forcing it to streamline and reduce its dividends.
The moment that Ben Dov's business plan for Partner ran into trouble, the huge leverage that Scailex assumed to acquire the stake turned into deadweight that sent its share price tumbling 80% over the past year, far more than the 50% drop in its base asset - shares in Partner.
This is the problem. The high leverage that worked in Scailex's favor when the share price was rising, hurt it even more when the share price fell. First, the virtual profit on the Partner investment disappeared, followed by the limited shareholders' equity that Scailex provided for the acquisition, and now, the market cap of the Partner shares is hundreds of millions less than the loan taken to buy them. This is reflected in the yield on Scailex's bonds.
How will this end? In the absence of Scailex's ability to repay its debts on the capital market because of the high yield of its bonds, Ben Dov has three options, none of which are particularly pleasant. The first is to sell part of Scailex's core assets to order to gain time to find a solution to the debt problem, or at least defer it. The second is to bring in a lot of personal money, which Ben Dov probably does not have. The third is what Ben Dov is trying to avert by every means possible: forego control of Partner, which is attached in favor of his bondholders.
Published by Globes [online], Israel business news - www.globes-online.com - on December 27, 2011
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