The term "cash cow" usually means a company with strong cash flows and especially high profits, which it distributes in full as dividends. It seems that in Israel today no company that better fits this description than Tnuva Food Industries Ltd., and not just because a substantial part of its profits comes from milking cows.
Apax Partners and Mivtach Shamir Holdings Ltd. (TASE:MISH) acquired control of Tnuva in January 2008 at a price reflecting a company value of NIS 3.8 billion. The two companies paid NIS 2.9 billion for 76.7% of Tnuva from kibbutzim and moshavim (which still own the rest of the company). The two companies financed most of the acquisition with bank credit (62% of the investment).
Since then, the buyers have paid back almost all of the investment through dividends that Tnuva distributed from its profits. Mivtach Shamir's financial reports, which include Tnuva's results, show that, since the acquisition, Tnuva has distributed to the Apax-Mivtach Shamir joint company NIS 2.5 billion in dividends. A substantial part of the dividends came from one-time profits on the sale of Tnuva properties in Tel Aviv. In addition, in 2011, Tnuva repaid an NIS 800 million owners loan to the joint company.
Mivtach Shamir's financial reports also show that the Apax-Mivtach Shamir joint company is due to repay NIS 1.4 billion in bank credit in 2014. It now seems that, after Apax and Mivtach Shamir have taken home the dividends, they are seeking a way to repay the debt they assumed to finance the acquisition. Signs have been growing lately that Tnuva's controlling shareholder, Apax (which indirectly owns 56% of the company), is seeking to make an especially profitable exit on its investment in the company.
In July 2013, "Bloomberg", citing "a source familiar with the plan", said that Apax had approached Clal Finance Underwriting Ltd. to lead an IPO for Tnuva on the Tel Aviv Stock Exchange (TASE) in the first quarter of 2014.
According to "Bloomberg", Apax - whose investments in Israel are handled by Apax Israel CEO Zehavit Cohen - plans to float Tnuva at a valuation of NIS 8 billion, the upper end of valuations that Apax has published for the company to date. Mivtach Shamir values Tnuva at NIS 5.1 billion, which is apparently the value at which it wants to acquire Apax's stake in the company.
Earlier this month, in response to a report that Apax was in talks to sell Tnuva shares to China's Bright Food Group Co. Ltd., Mivtach Shamir confirmed that, from time to time, Apax receives approaches about the sale of its stake in Tnuva and that it examines them, but that, as of the date of the report, none of these approaches had resulted in negotiations.
An IPO of Tnuva, even at a value of less than NIS 8 billion, would give Apax and Mivtach Shamir an extraordinary exit with a profit of billions of shekels and a return on investment of hundreds of percent. An exit of this kind is usually characteristic of high tech, and not the food industry, in which Tnuva operates.
This raises the question how a business like Tnuva, which rests on the domestic market and the Israeli consumer, and faces price controls on some of its products, is able to generate such a high return for its investors, especially during a time of heightened consumer awareness, which briefly resulted in the cottage cheese boycott against the company. The answer can be broken down into three parts.
1. The controlling interest in Tnuva was acquired for a bargain: The kibbutzim and moshavim buyers organizations, which sold the controlling interest in Tnuva to Apax and Mivtach Shamir, retaining a 23% stake in the company, sold the shares for far less than their value at the time, even before the subsequent price hikes and jump in the value of the company's properties.
It should be noted that the kibbutzim and moshavim have a special status at Tnuva: they are not only shareholders in it, they are also its main suppliers of milk. It is only natural that some of them were worried at the time of the sale about the change in control of their largest customer. In retrospect, it seems that the dairy farmers surrendered to the warm embrace of Apax, which eased their fears, and they did not thoroughly examine Tnuva's real value.
2. Actions taken under Tnuva's new owners: Apax Israel CEO Zehavit Cohen implemented a strategy aimed at the profitable exit is now coming to fruition at Tnuva. During her tenure as Tnuva's chairwoman, and even after her forced resignation following the cottage cheese protest, Tnuva avoided large pay hikes for its employees, as well as substantial capital investments (Tnuva's amortization expense in 2010-12 was higher than its investments in fixed assets). It closed a failed business in Romania, and sold valuable real estate, beginning with the wholesale market and dairy in Tel Aviv (these two sales yielded Tnuva a capital gain of NIS 1 billion in 2012). Each of these steps turned Tnuva into a high yield, sophisticated cash cow.
3. The market structure: Tnuva operates in a highly concentrated and uncompetitive market - it is a monopoly for some products - which enables it from time to time to initiate price hikes. This was the case until two years ago, when the cottage cheese protest broke out, and it is apparently the case now, as Tnuva exploits the waning of the protest to drive the prices for its products a little higher.
In late August, the Ministry of Agriculture decided to impose price controls on 5% fat white cheese and 38% fat double cream, after an external auditor found that Tnuva's profits on these two items were "extraordinary and unreasonable." The Ministry of Agriculture Supervisor of Prices estimated at the time that the price controls would lower prices for these products by 20%. "It cannot be ruled out that we will intervene in other products, if necessary," he said.
The remark could be very significant for Tnuva's future shareholders. Unintentionally, the Ministry of Agriculture sent a warning to buyers of shares in a possible future IPO, basically warning of tighter regulation of the company. Until this threat materializes, Tnuva's shareholders will presumably continue to try to raise the prices for its products, in order to continue to milk dividends from it.
Published by Globes [online], Israel business news - www.globes-online.com - on September 9, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013