Ilan Ben-Dov is probably just the first. The first leveraged tycoon forced to hand back the keys; in his case, control of Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR). You would have to be especially innocent to believe that he will also be the last.
As things look now, the summer of 2012 will bring the leveraged era to an end; a ten-year period in which highly leveraged holding companies dominated the economy. Like Ben-Dov, they too, will return to their natural size, before they began to raise, with great ease, billions of shekels from the public to invest in Israel and abroad.
It is to Ben-Dov's credit that he has already understood his condition and was prepared to return to his starting point before he became a telecommunications tycoon. Less than three years after Scailex Corporation (TASE: SCIX; Pink Sheets:SCIXF), which he controls, borrowed the astronomical sum of NIS 4 billion (from banks, bondholders and a seller's loan from Hutchison Telecommunications International Ltd. (NYSE: HTX; HKSE: 2332)) to finance his acquisition of Partner, he capitulated to the pressure of the debt, the lawyers' letters from his creditors, and the almost daily newspaper headlines calculating his losses.
After writing off hundreds of millions of shekels of his personal fortune, he is handing control of Partner back to its former controlling shareholder, Hutchison Telecommunications International Ltd. and is returning to what worked well for him before - the marketing of Samsung mobile phones.
Blind to the risks
The Ben-Dov model 2012 is far less wealthy than the 2009 model. His image has suffered almost irreparable damage, and he probably is no longer the haughty businessman of yore. Nonetheless, he is still a wealthy man, with substantial real estate assets, and, so far as is known, no personal debts to the banks, and thanks to the "generosity" of Hutchison, he can open a new page.
Hutchison Telecommunications paid $125 million for control of Partner's controlling shareholder, Scailex, plus agreeing to delay repayment of its seller's loan, thereby allowing Ben-Dov to begin again almost free of debt, if his failed investment house Tao Tsuot Ltd. (TASE: TAO-M) is not taken into consideration. Suny Electronics Ltd. (TASE: SUNY) and Scailex's bondholders, who allowed Ben-Dov's adventurism, are getting off with only minor bruising.
In retrospect, Ben-Dov can be accused of wild insanity (he admits that the investment in Partner was too big for him), and of incorrectly pricing the risks of the acquisition, but the people who allowed him to leverage such a big and risky acquisition with cheap credit are just as guilty in the fiasco. This charge is leveled at the financial institutions and the managers of the public's savings, which provided NIS 2 billion in financing for the acquisition of Partner by buying Scailex bonds in late 2009.
Those were days of partying in the markets following the global credit crisis that erupted the year before. But at the same time, there were already financial institutions in talks for the first great debt settlement - that of Africa-Israel Investments Ltd. (TASE:AFIL), which had leveraged its investments through large bond issues on the TASE. Moreover, big questions were being raised at the time over Tao's ability to repay its debts to the public.
None of that deterred the institutions, which seemed to be totally blind to the risks of the Partner acquisition. These risks materialized with the new regulations and competition in the mobile market, which now prevent Partner from distributing the dividends, which Scailex had planned to use to repay its debts.
The low interest rate on Scailex's bonds and the lack of collateral demanded by the bondholders in the event that something went wrong to Ben-Dov's rosy Excel spreadsheets demonstrate just how blind and irresponsible the institutions were, and this is reflected in the junk bond status of Scailex's bonds last week.
But Ben-Dov is unlikely to be the last tycoon who will lose control of the businesses he bought with cheap money provided by the financial institutions. Last year, we saw the price collapse of securities issued by the main leveraged holding companies and it can be said that this is the end of an era.
The Israeli economic slowdown, regulation, and the global economic crisis are come together to slash the profits of many non-financial businesses, some of which are actually strong assets, which the tycoons acquired, and which they used as the source of capital to repay the huge debts they assumed, exactly as happened with Ben-Dov and Partner.
Therefore, in the coming years, we will probably see more and more tycoons forced to sell the companies they acquired with leverage to new owners with deeper pockets (like Hutchison and Partner), or even sell them to the bondholders who provided the leverage to make the acquisitions.
Published by Globes [online], Israel business news - www.globes-online.com - on June 5, 2012
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