It's one blow after another for investors in private equity firm Apax Partners. Following the valuation published by Mivtach Shamir Holdings Ltd. (TASE:MISH)yesterday for Tnuva Food Industries Ltd., showing that the food company controlled by Apax lost billions of shekels in value last year (a valuation that Apax disputes), it emerges that it is sitting on a loss of hundreds of millions of shekels on its other investment in Israel, Psagot Investment House Ltd.. Apax's financials, released to its investors yesterday, reveal something dramatic: Apax Partners Israel managing partner Zehavit Cohen has faced up to reality and revealed that Psagot is worth less, a great deal less, than she hoped.
Here's a number: NIS 2.7 billion is what Apax paid to buy Psagot from York Capital in November 2010. Here's another number: NIS 3.67 billion. That's the value that Cohen marked Psagot at just a few weeks after the acquisition. "You don't understand," she would tell us when we wrote throughout that year that she paid too much for Psagot, and that if NIS 2.7 billion looked like overdoing it, NIS 3.67 billion was simply fantasy.
At the time, we wrote that it was impossible to explain such a dramatic revaluation of Psagot in such a short time. "Excel will put up with anything, but in the investment sector no substantial change has occurred in the state of business. If anything, there has been a deterioration, as a result of the reform introduced by the Ministry of Finance that will restrict and reduce management fees in provident funds. And provident funds represent Psagot's main source of revenue." Cohen responded with a short, sharp sentence: "You'll yet see that I'm right." She apparently thought that she could repeat the trick she played at Tnuva and hike prices, i.e. management fees. As we now know, it didn't work.
A year has gone by since then, and in Apax's financials the following number appears: NIS 2 billion, representing a 45% reduction compared with the previous valuation of Psagot. It's no surprise. Everything conspired against Psagot: the slowdown in the economy, the shrinking of the assets of the mutual funds, the rise in running costs, the generous pay agreements that Cohen awarded senior employees so that they wouldn't leave, and management of a large proportion of the assets at zero charge.
Nor is this the end of it. The current reduction in value is only a preview, because MK Haim Katz has arranged for Cohen a further cut in provident fund management fees that will manifest itself only in the next report.
Apax is not a public company and has considerable leeway in its valuations, but, even with the aid of creative accounting, thanks to Katz there is now no avoiding a further substantial cut in the value of Psagot.
A private equity fund expects an annual return of 15%. In other words, within five years of the acquisition, the value of Psagot ought to reach NIS 5 billion. That is an imaginary number, and it will remain so for a very long time.
And that is the unpleasant truth that Apax won't like. The fund simply bought Psagot at an inflated price, just like Ron Lubash when he bought PKN, and Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS) when it bought Ilanot Discount. True, unlike Ilanot and PKN, Psagot is an excellent asset, but even a good asset bought at too high a price will occasion the new owners a heavy loss.
So what is Psagot really worth? Let's take a look at the environment. Excellence Investments Ltd. (TASE: EXCE) has a market cap of some NIS 700 million; The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5) has market cap of NIS 2 billion. Menorah Mivtachim Holdings Ltd. (TASE: MORA), which holds a pension fund and will be less hard hit than others by the reduction in management fees, has a market cap of NIS 1.7 billion. The market cap of The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5), which has an anchor in health insurance, is NIS 2.6 billion, while that of Clal Insurance is NIS 2.9 billion. NIS 3.7 billion was a pipe dream from the start. Is NIS 2 billion realistic? Does is take account of all the threats to Psagot, or does Apax perhaps prefer the salami method in making write downs?
Cohen may perhaps shortly not be Apax's Israel representative, but her severe mistake in agreeing, on the basis of erroneous assumptions, to buy Psagot at an exorbitant price, and her arrogance in revaluing Psagot by 35% over the purchase price just weeks after the acquisition, will yet be paid for with compound interest by Apax's investors.
Published by Globes [online], Israel business news - www.globes-online.com - on February 29, 2012
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