At first glance, the headline in Hebrew daily “Yediot Ahronot” about a major investment by Poalim Investments in Koor Industries (NYSE: KOR) seemed just like another silly season story. Only a few days previously, Poalim Investment had arranged strategic deals with IDB Holdings and Bezeq, which for the moment have not been consummated by Poalim Investment’s owner, Shrem-Fudim-Kelner.
This time, there seems to be meat to the story, even though the companies have not confirmed the negotiations by issuing reports to the Tel Aviv Stock Exchange about contacts between them. Sources who insist upon being called “capital market players”, confirmed yesterday that there have been talks between the parties. They assert that a $120-150 million investment by Poalim Investments in Koor seven-year convertible bonds is on the agenda.
Conversion of the bonds would give Poalim Investments a 20% holding in Koor, making it the concern’s second largest shareholder, after Claridge, which has a 35% stake, including the shares held by Koor CEO Jonathan Kolber. Sources close to Poalim Investments yesterday claimed that the company’s managers, led by Avigdor Kelner and Rimon Ben Shaul, are expected to come to Kolber’s rescue by pulling Koor out of its current severe crisis.
On the face of it, this is a logical match of a cash-rich, investment-hungry company and a debt-ridden, leveraged concern that desperately needs an injection of capital. In addition, the corporate leaders, Yitzhak Shrem and Jonathan Kolber, whose offices share the Platinum House in Tel Aviv, have a personal relationship.
It may also be assumed that the banks, watching Koor’s rapid decline with alarm, will be pleased by the marriage because Koor could use an injection of capital by Poalim Investments to pay off some of its debts to them.
Poalim Investments wants to get its hands on a cash cow that will produce cash on the scale of its investment in Bezeq several years ago, which was also in the form of convertible bonds, by the way. The company also wants to grab a business opportunity in the advanced technologies sectors. Only two days ago, Poalim Investments announced a $17.4 million investment in an Emblaze Systems (LSE: BLZ) spin-off, AlphaCell. This investment follows the announcement of a planned investment of a similar amount in Virgin Mobile, a virtual mobile network that will be set up with Pele-Phone and Britain’s Virgin group.
A recent report by Maalot – The Israeli Rating Company noted Poalim Investment’s financial solidity, reflected by its NIS 500 million in unexploited bank credit lines. Last week, the company raised an additional NIS 100 million in non-negotiable bonds without collateral. One may wonder if the institutional investors that participated in the financing round intended for part of their money to be invested in high-risk assets such as Koor.
On the second side of the equation, there are rumors that Koor is once again facing the unhappy prospect of an income shortfall. Koor posted a huge NIS 1 billion Q1 2001 loss, mostly arising from its failed investment in ECI Telecom (Nasdaq: ECIL), an investment that will create a much greater loss for Koor in the future. At the end of the first quarter, Koor’s debts, most of them owed to Bank Hapolaim, totaled over NIS 2 billion, excluding the debts of the combined companies.
Bank Hapoalim owns 21% of Koor. In addition to its proportional share in Koor’s losses, the bank granted billions of shekels in loans to Koor and ECI. The bank recently put its Koor shares up for sale, which, as things stand now, will provide a tax write-off that will partly offset the heavy losses the concern has caused the bank.
Koor shares are currently traded at $7, and capital market sources close to the company claim that Claridge says that there is “nothing to talk about” at prices below $10 a share. The sources claim that Poalim Investments is not the sole concern that has approached Koor’s chiefs, Kolber and Dan Biran, with offers of a strategic deal.
Koor, traded at a market value of $575 million, has a 33% stake in crisis-ridden ECI, plus holdings in Makhteshim Agan, Telrad Networks, Elisra Electronic Systems, and Koor Venture Capital, which has invested tens of million of dollars in the past year in start-ups and venture capital funds.
Koor Venture Capital’s principal investment – $35 million – was made last year in the Polaris III Fund, associated with Shrem-Fudim-Kelner, which controls Poalim Investments. This investment is just a fraction of the long-standing matrix of relationships between the heads of Koor and Shrem-Fudim-Kelner, which was once considered to be Claridge’s banker (Claridge is owned by Charles Bronfman and Jonathan Kolber). The parties recently cooperated in what seems to have been a hostile take-over attempt of NICE-Systems (Nasdaq: NICE), investing tens of millions of shekels in the venture.
In the mid-1990s, when Shrem-Fudim-Kelner was still called Dovrat-Shrem, Claridge invested tens of millions of dollars in the group’s companies, Ordan, Leader Underwriters’ and Securities, and Polaris Venture Capital. The parties made a successful joint investment in Paz, and a much less successful one in Tisom Business School, which has since closed.
More recently, Koor and Poalim Investment’s joint investments have incurred immense losses, amounting to tens of millions of shekels. Koor was seriously hurt by its investments in Poalim Investment’s BVR Systems (Nasdaq: BVRS), while Poalim Investments received a body blow from its investment in Koor’s ECI. These recent failures have not prevented Yitzhak Shrem and Jonathan Kolber from joining hands again to cooperate in what would be their largest joint venture ever.
Published by Israel's Business Arena on 28 June 2001