Ilan Ben Dov (again) surprised the market in his battle for survival, with reports of a deal to sell control of Orange franchisee back to its previous owner, Hutchison Telecommunications International Ltd. (NYSE: HTX; HKSE: 2332). One paper put it, "Ben Dov has found a solution to his debt burden."
But we should wait before popping the champagne to celebrate Ben Dov's escape from his debts. The problem to the impossible debt pyramid that he built on Partner's base is far from solved. Below are some of the potential pitfalls to the deal.
1. Where is the transparency? The media has reported various details about the structure of the pending deal, including a $100 million investment by Hutchison to reacquire control of Partner through its parent company, Scailex Corporation (TASE: SCIX; Pink Sheets:SCIXF). Scailex, and its parent company Suny Electronics Ltd. (TASE: SUNY). Both these companies released only laconic notices about the deal, without any details. The reason could be that the negotiations are still liable to break down. Experience indicates that this may not be a done deal, and that the parties are still seeking creative solutions to various problems. After all, a bit more information ought to have been disclosed about the structure of the pending deal, which would have a dramatic effect on various market parties, beginning with Scailex and Suny's bondholders.
2. Scailex bondholders may be seeking a debt settlement. Hutchison Telecommunications made a nice deal in 2009, when it sold control of Partner to Ben Dov. Why should it put its healthy head into Scailex's sickbed, to control a company burdened by a NIS 2.4 billion debt? Moreover, this debt is far greater than its assets, and its primary asset - Partner - is struggling with falling profits and stronger competition.
Do not imagine that Hutchison's executives are fools, nor are they philanthropists. Their first priority is to save the $300 million seller's loan the company lent Scailex to acquire Partner, and the current value of the Partner's shares on which they have a lien covers only a fraction of the loan.
Acquiring Scailex will presumably include a debt settlement with its bondholders, who are owed NIS 1.8 billion. A settlement will likely include a capital injection, the sale of its Samsung mobile phones import and distribution business, and additional liens to the bondholders, but in exchange, they will have to make concessions, either write-offs or deferral of payments. Under the circumstances, it is hard to see a scenario without a debt settlement for Scailex.
3. How can the Suny problem be solved? Ben Dov knows that the solution he is crafting must include a debt settlement for his company at the top of the pyramid - Suny. Although its debt is a relatively small NIS 240 million, those who smell an opportunity, such as Yaakov Luxembourg are seeking to take over the tip of the pyramid through Suny's bond debt.
A possible solution is to transfer Ben Dov's baby - the Samsung mobile phones import and distribution business - from Scailex to its parent company, Suny. This would generate cash flow to repay the bonds, distancing hostile elements.
But there is small piece of this puzzle that does not fit. How can Suny buy the mobile phones import and distribution business when the company has no cash and a going concern warning appended to its financial report? Will Ben Dov pull another rabbit out of his hat? Can such a complicated deal be pulled off at all?
In view of the paucity of information, it has to give clear answers to these questions, but it can be said with certainty that Ben Dov is close to selling his investment in Partner at a huge loss of over NIS 1 billion, after personally paying the price for creating a debt-heavy pyramid.
Published by Globes [online], Israel business news - www.globes-online.com - on June 3, 2012
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