There has been a storm in the Israeli capital market in the days since Ilan Ben-Dov controlled Suny Electronics Ltd. (TASE: SUNY) announced the sale of subsidiary Scailex Corporation (TASE: SCIX; Pink Sheets:SCIXF), which controls Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), back to Hong Kong-based Hutchison Telecommunications International Ltd. (NYSE: HTX; HKSE: 2332) last Tuesday. Prices for the securities of Suny and Scailex soared on the day of the announcement, due to the consensus that the transfer of control of Scailex to Hutchison would improve the situation of Scailex's shareholders and bondholders. However, the mood changed by Thursday, as the obstacles that Ben-Dov must navigate to close the sale became clearer.
A poll by "Globes" among Scailex bondholders found that most of the investment institutions oppose the deal as presented by Ben-Dov and Hutchison, raising a major question that it will go ahead in its present format. It appears that Ben-Dov and Hutchison will have to negotiate with the bondholders to reach a deal. On the other hand, the bondholders do not have cause to demand immediate repayment of the bonds and take over Scailex's assets, as the company has always met it debt payments and is not in arrears.
On Thursday, Senior Deputy Supervisor of Capital Markets, Insurance and Savings Elior Gabay asked the large investment institutions to inform him of their positions on the proposed Scailex sale. The institutions, it turns out, while preferring Hutchison's control of Scailex instead of Ben-Dov, are beginning to object to the structure of the deal reached by the parties. The media hullabaloo about the sale has also drawn the attention of politicians, and Knesset Economic Affairs Committee chairman MK Carmel Shama-Hacohen (Likud) has convened a special committee meeting on the matter this week.
Under the deal, Ben-Dov's Suny will sell 75% of Scailex to Hutchison Telecommunications for $125 million, which will reduce Suny's stake in Scailex to 3.71%. At the same time, Scailex will sell to Suny its Samsung mobile phone import and distribution business for $100 million, a fraction of the value in previous negotiations.
Most of the objections to the sale are over its haircut for Scailex bondholders. Scailex's bond debt is NIS 1.75 billion, and it will make an offer to purchase at least half the debt of its bond series (except for the Series A convertible bond) at an average weighted price of 69% of the bonds' adjusted value. This is equal to an average discount of 15% on the bond debt, amounting to NIS 250 million. At the same time, Hutchison will give Scailex a three-year extension repay the $300 million seller's loan, taken to acquire Partner in the first place, until 2017.
In a letter to Scailex's bondholders, the Ministry of Finance's Capital Markets Supervision Department said, "In view of the possible harm to investors' rights, we ask for your comments, after you review the deal, about how you will cover investors' money which you manage in trust." The department asked for responses to three key aspects of the deal, including the price for transfer of Scailex's Samsung phone business to Suny, and an up-to-date analysis of the effect of the deal on the debts that you hold. The bondholders have until Tuesday to respond.
The Capital Markets Supervision Department cannot give orders to the investment institutions it oversees, and it will presumably not tell them how to act in this case. Market sources believe that the Ministry of Finance is not pleased that Scailex will not repay its full debt to the public under the proposed sale of the controlling interest in the company, and that Suny will take the sale proceeds without first seeing to the interest of the bondholders. It is clear that there is not enough money to pay the debts, and that the bondholders will only receive part of what is owed them.
The sources say that the Ministry of Finance is worried that secured creditors will be repaid before savers, and it wants the investment institutions to prevent this from happening and fight for the savers, so that the company's owner will emerge only with cash and assets after the debt holders are paid. "The Ministry of Finance is already setting the limits of the parties' negotiations, a step that could turn out to be helpful for the institutions and strengthen their position against Ben-Dov," said a source.
Top investment institutions executives share this opinion. They see the Scailex sale as a dangerous precedent in which a shareholder takes the money while the debt holders are left with the losses. This is absurd. The shareholders should inject capital into a company when it owes money to bondholders, not take the money.
The letter from the Capital Markets Supervision Department is not the first of its kind in cases involving large debt settlements, and more will be written in the future. However, this time, the department is telling investment institutions that it will not accept a situation in which they agree to a deal in which Ben-Dov emerges with assets at the expense of the institutions' own investors.
Psagot Investment House Ltd., which hold NIS 160 million of secured Scailex bonds, will likely lead the opposition to the sale of the company, as Psagot is the largest bondholder in Scailex. Sources expect Psagot to take a hard line, and insist that Scailex's shareholders will not see a shekel until the bondholders are paid in full, or at least to their satisfaction. Psagot has asked the trustees of Scailex's bonds to convene an urgent bondholders meeting to appoint bondholders representatives to discuss a deal.
Meitav Investment House Ltd., which owns NIS 32 million worth of Scailex bonds, is also showing signs of displeasure at the sale of the company. Meitav said on Thursday that it was still studying the deal's details, but, "an initial review of the structure indicates that it is unreasonable for the bondholders."
Another top investment institution executive said, "The deal is a bad precedent. If it goes through, no shareholder in the future will agree to inject capital as part of a debt settlement. Ben-Dov should be the last man to get anything from the deal, and then only after the bondholders get everything owed them."
Published by Globes [online], Israel business news - www.globes-online.com - on June 10, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012