More ego than upside in IDB bids

Shai Shalev

Except for the option to sell the remaining shares in Makhteshim Agan, IDB has no holding that can give a buyer a big upside.

Over a year has passed since the debt settlement case at IDB Holding Corp. Ltd. (TASE:IDBH) began, and in this period, the focus of its executives switched from rebuilding the companies and business operations to complex financial measures intended to guarantee their survival. While the talks on a debt settlement dragged on and on, both in court and outside of it, tens of millions of shekels were taken from the company's coffers to pay consultants, lawyers, assessors, and other business sector vultures.

But, possibly surprisingly, the bottom line is that bondholders of IDB Holding, and especially the bondholders of subsidiary IDB Development Corporation, profited from the time that has passed. The bids filed with the court on Sunday by the candidates to acquire control of the company - Eduardo Elsztain, the Nochi Dankner-Alexander Granovsky consortium, and unknown businessman Motti Ben-Moshe - reflect a much higher return than IDB Holding's bondholders could have obtained when the debt settlement talks began.

As far as IDB Development, which holds IDB's operational activities, is concerned, the improvement is much greater. Over the past year, prices for its bonds have almost doubled and they are now close to their adjusted value, and their yields reflect a low rate of risk.

The improvement in the condition of IDB's bondholders is mostly due to the rally in financial markets in the past year, which greatly increased the value of IDB's assets. This is especially true for the rise in the share prices of subsidiaries Koor Industries Ltd. (TASE:KOR), Property and Building Ltd. (TASE: PTBL), Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL), and, of course, Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), which has been up for sale for months. All of a sudden, IDB has meat, to tempt, albeit only a few, investors.

Buyers will struggle to create value

So much for the good news. The less good news for the happy buyer that the court will pick when the process is over, is that it is very hard to see how he will profit from his investment. The bids filed with the court on Sunday give a valuation of NIS 1 billion for IDB Development (before the capital injection), reflecting the full value of IDB Holding, and they appear to have been made more for reasons of ego than pure economic thinking underpinned by an organized plan for creating value.

When examining IDB's main remaining holdings, we find that Clal Insurance, which is up for sale, following the sale by IDB of several prominent assets, especially control of Clal Industries and Investments Ltd. (TASE: CII) and the controlling shares in Makhteshim Agan Industries Ltd.

IDB's buyer will struggle to create value from remaining major investments in its portfolio in the coming years, mainly because of domestic regulation and competition (Cellcom and Shufersal Ltd. (TASE:SAE)), the oil exploration failure (Modiin Energy LP (TASE:MDIN.L)), and the sale of most of the Credit Suisse Group AG (NYSE: CS; SWX: CSGN; XETRA: CSGZ) shares - IDB's most noteworthy financial investment in recent years.

In fact, except for the option to sell the remaining shares in Makhteshim Agan, IDB has no holding that can give a buyer a big upside. This means that it unclear how and when the buyer of the controlling interest will be able to withdraw the dividends needed to repay the financing taken to make the huge investment. This is even before mentioning that the market rally might end and make a U-turn.

When the financial instruments with complex structure planned by IDB's bidders to finance the acquisition are added to the equation, concern arises that, in a few years, we may again witness the show of holding companies unable to pay their debts, but this time, they will be by the companies that acquired IDB.

Published by Globes [online], Israel business news - - on November 4, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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