Thursday afternoon. The offices of law firm Gross, Hodek and Partners, Shaul Hamelech Street, Tel Aviv. At the table sit Motti Zisser, holder of the controlling interest in Europe Israel, and Advs. Yosef Bankal and Ofer Zuzovsky of law firm Reved, Magrizi, Bankal, and Caspi. On the other side sits Uzia Galil, at his side Advs. David Hodek and Rona Bergman of Gross, Hodek and Partners.
Uzia Galil receives a telephone call. On the line is Elron’s US lawyer, very anxious. "There’s a report of the deal on the "Globes" Internet site," he says. The room is stunned. After a few seconds of shock, the parties realize that the plan to close a deal on Sunday will fall through, and matters have to be settled fast. Within a few hours, the lawyers have gone over the fine print, and the deal is signed midnight Thursday. Thus, Europe Israel bought 40% of the shares in Elbit Imaging owned by Elron.
Elron can be happy at deriving a capital gain of $20 million after tax, in no small measure due to the fact that it managed to charge a premium for control of Elbit Imaging, despite holding less than 51%. The Recanati family’s IDB group also expressed satisfaction at the capital gain which will find its way upwards - Discount Investments and PEC will post a gain of $7.5 million, IDB Development $5.5 million, and IDB Holdings $3.9 million.
Europe Israel is buying 40% of the shares in Elbit Imaging (37.3% fully diluted) for $145 million gross. A dividend of $2 per share must be deducted from this sum (Zisser would not consent to absorbing the $43 million dividend Elbit is distributing), leaving the deal worth $128 million net.
The reason why Zisser bought Elbit Imaging and its holding in Elscint is, of course, his desire to expedite the expansion of his real estate businesses in Central Europe, where he plans to build commercial centers in Poland, Hungary, and the Czech Republic. Zisser intends to use Elbit Imaging’s fat cash balance to maximize his financial capacity. At a conservative estimate, a cash holding of $500 million is worth $2 billion in bank loans.
But what he ought not to do, and in fact cannot, is to liquidate Elbit Imaging and Elscint. The same $500 million (less $100 million that will be required for Elbit Imaging’s offer to purchase for Elscint) held by Elbit Imaging and Elscint will not find their way out of the companies. The financial reason is that a dividend distribution involves sharing the spoils with all the investors.
The legal reason is that, in the agreements for the sale of its medical imaging activities to US company General Electric and Picker of Britain, Elbit Imaging undertook "to ensure the economic capability" of the companies, as the manufacturing activity of the divisions sold remains in Israel. Under the agreement, economic capability means $150 million of Elbit Imaging’s shareholders’ equity will remain in its coffers, with the sum gradually reducing over five years.
Because of the lack of certainty over the consequences of these deals, Europe Israel an Elron agreed on a "price adjustment mechanism." If it turns out that, as a result of the deals with GE and Picker, greater than expected liabilities arise, the deal price will be reduced accordingly. The existence of this clause in the agreement means that Elron itself, despite having sold its holdings, will not distance itself from what happens in the company, and that it has a interest in keeping an eye on things.
Beyond the details of the deal, another question resounds in investors’ ears: has Elron screwed us?
Three years ago, Elbit announced a spin off into three different companies - Elbit Systems, Elbit (the civilian company), and Elbit Imaging. The investors did not know at the time that this was a "salami" strategy, in which the slices sold as individual units are worth more, altogether, than the whole sausage. Elbit was cut up into slices that were sold (Elbit Imaging, Elscint) and apparently will be sold (Elbit Systems) for handsome prices to well known international conglomerates.
Elbit Imaging is now turning into a financial entity, which will finance highly risky real estate deals in Eastern Europe - certainly not the reason why investors bought shares in the company.
Published by Israel's Business Arena on February 28, 1999