Suny Electronics Ltd. (TASE: SUNY), controlled by Ilan Ben-Dov, and its subsidiary Scailex Corporation (TASE: SCIX; Pink Sheets:SCIXF) notified the TASE after the market closed yesterday that Chinese holding company Hutchison had cancelled its acquisition of Scailex, which owns 44.5% of Israeli telecommunications company Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), operator of the Orange franchise in Israel. The sale was intended to increase Suny's cash reserves, enabling Ben-Dov to repurchase bonds. The deal with Hutchison was conditional on the repurchase.
The deal was in effect a buyback of Partner, of which Hutchison sold the controlling interest to Scailex for $1.38 billion in 2009. Scailex owes some $760 million, including $300 million to Hutchison, which lent it the money to buy the stake in Partner.
In a statement on its website, Hutchison Whampoa said, "Persall Pte Ltd (“Persall”), a subsidiary of Hutchison Whampoa Limited, and Kelburgh Pte Ltd (“Kelburgh”), a subsidiary of the Li Ka Shing Foundation, announced today that they issued a joint notice terminating the conditional agreement entered into on 5 June 2012 to acquire from Suny Electronics Limited 50 per cent and 25 per cent respectively of the share capital of Scailex Corporation Ltd (“Scailex”). Scailex owns 44.5 per cent of the share capital of Partner Communications Company Ltd, a leading telecommunications services provider in Israel. The termination by Persall and Kelburgh was in exercise of their rights under the agreement on the grounds that conditions under the agreement have not been fulfilled."
Why did Hutchison cancel the deal? The answer was only available at midnight yesterday, when Suny announced "new adverse findings" discovered by Hutchison in its due diligence, which it concluded had a material adverse effect on the terms of the deal, and led to its cancellation.
The first adverse finding was the sharp drop in the operating results of Partner, on the basis of its financial report for the second quarter of 2012. Partner reported a 41% drop in net profit to NIS 120 million and a 24% drop in revenue to NIS 1.43 billion. It also lost a net 49,000 mobile subscribers during the quarter. Israel's established mobile telephony companies have come under considerable pressure recently because of a sharp cut imposed by the regulator in inter-connect fees they charge subscribers, and the entry of new players into the market, leading to a steep drop in call charges.
The second reason that Hutchison cites for cancelling the deal is inaccuracies in one of the presentations by Suny in the acquisition agreement. Suny did not say which presentation was in question, or what the incorrect figures were. Hutchison also said that there were a number of other breaches of the acquisition agreement, and that there was real concern that it would not be able to buy Scailex's bonds under the terms of the deal, in view of objections by some bondholders. "The buyers expressed concern that it would not be possible to complete the purchase of the company's bonds according to the conditions of the partial purchase offer for the bonds given the adamant stance of the bondholders' representatives against the offer," Scailex said in a statement.
A poll conducted by "Globes" among investment institutions that hold Scailex bonds found that most of them opposed the deal proposed by Ben-Dov and Hutchison, which raised a major question whether the deal could go ahead as proposed. The bondholders objected to the haircut they would have taken, averaging 31% of Scailex's bond debt, amounting to NIS 250 million.
As a result of the cancellation of $125 million sale of Scailex, Suny and Scailex will now have to find other sources of cash, and the bondholders' haircut could now be even greater.
Published by Globes [online], Israel business news - www.globes-online.com - on August 21, 2012
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