2004 will be a good year for investors and for raising money. The principal players in the US capital market believe that the initial signs, which began emerging in late 2003, with bond issues, mergers, and acquisitions, indicate that the capital market is awakening from its three-year slumber. If all the prophecies for 2004 come true, we can expect a wave of issues, including quite a few IPOs.
Lehman Brothers managing director Leonard Rosen, who heads the firm’s Israeli business, told “Globes”, “The past two months have been the most intense period in Lehman Brothers’ Israeli group for as long as I can remember, including the boom. The deals in which we have been involved during these past two months include Teva Pharmaceuticals’ (Nasdaq: TEVA; TASE: TEVA) acquisition of Sicor, Teva’s billion-dollar bond issue, Ormat Industries’ (TASE:ORMT) bond issue on the high-yield market, and Verint Systems’ (Nasdaq: VRNT) acquisition of ECtel’s (Nasdaq: ECTX) security division. To these can be added the government bond issues. The total comes to $5.5 billion, in only two months.”
”Globes”: Will this be followed up?
Rosen: ”We believe it will. This is the most active period for issues and acquisitions that I’ve seen in Israel for many years, including the boom. A large number of deals are in the pipeline right now in all sectors, including IPOs.
”The many deals reflect a number of trends currently visible in the market. The most prominent is the 50% rise on Nasdaq that began in 2003. A still greater rise is expected for 2004. We’re seeing several types of deals likely to go through in 2004, including a number of types that will be very important for Israeli companies.
”One kind of deal we expect to see in the near future, which is very relevant for quite a few Israeli companies, is second issues, which are designed to reacquaint the capital market with the company a re-IPO, as it were. These concern Nasdaq-listed companies that the market has forgotten. This is a second issue with features similar to those of an IPO. Many Israeli companies that conducted their IPOs during the boom are still listed, but trading in their shares is low; they have no base of institutional investors, nor do analysts cover them. For these companies, this type of re-IPO is an important opportunity to re-penetrate the consciousness of investors and the capital market.
”A second kind of deal expected this year is financing for acquisitions companies trying to raise money to pay for their acquisitions of other companies. These are the two types of deals that are expected to give a strong push to the reawakening of the capital market.”
Two weeks ago, Verint announced its acquisition of ECtel’s security division for $35 million in cash. The purchase was Verint’s first use of the $130 million it raised this past summer to finance its acquisitions. Lehman Brothers advised Verint on the deal.
ECtel’s security division finished 2003 with a $5 million loss on revenue of less than $10 million. Rumors of an impending acquisition circulated in the capital market almost from the time the negotiations began. The capital market believes that the rumors were responsible for at least some of the damage to this division’s business. At the same time, the question arises of how the $35 million price tag was determined. Analysts covering the company predict that Verint will manage to increase the revenue of the division it acquired through crossover sales, among other ways. Analysts also believe that the two companies’ product suites will work well together.
”Verint very thoroughly examined the division it acquired, and reached the conclusion that it had added value in several respects,” Rosen explains. “In my opinion, with president and CEO Dan Bodner at the helm, Verint will be able to get much more out of the acquired division than it is worth at present. Verint believes that with the help of its target market, it will be able to significantly expand its business intelligence activity to markets in Latin America and Asia.”
Another large transaction led by Lehman Brothers, which was closed last Friday, was Ormat’s bond issue on the high-yield market. Ormat raised $190 million at a fixed dollar interest rate of 8.25%.
Ormat acquired the assets of US company Covanta, which went bankrupt. These assets included two geothermal power stations, and 50% of a third. This and other acquisitions have made Ormat the third largest producer of geothermal energy in the US. The shares of the subsidiary that operates the power stations in Ormesa, Nevada and in Mammouth, California, half of which were acquired in the Covanta deal, will be used as collateral for the bonds.
”This is the first time since 2000 that an Israeli company has raised capital through a bond issue on the high-yield market,” Rosen says. “Very few Israeli companies can enter the high-yield bond market. Most Israeli companies raise money on the stock market, first of all because they’re more familiar with it, and secondly because it’s easier for technology companies to raise money through equity.
”Ormat has been in business since 1965, and has achieved dramatic growth. Our acquaintance with Ormat management came about as a result of the investment by the Bronitzky couple (who founded and now head Ormat, H.G.) in Orbotech (Nasdaq: ORBK) and Orad Hi-Tec Systems (XETRA: OHT) (The Bronitzkys were among the original investors). In my opinion, Ormat is one of the best blue chip companies in Israeli industry.
”During the road show, company management, headed by Ormat president Yehudit Bronitzky, met with institutional investors not previously familiar with Ormat. The investors were very impressed by the company and its management, which made our work much easier. It was a pleasure to introduce them to the global market.
”Only major institutional investors who make long-term investments participated in the issue, mainly insurance companies and mutual funds. The interest rate for the bonds is considered aggressive. Nevertheless, there were very good responses from investors to whom Ormat was unknown. As a rule, there are very few opportunities to invest in geothermal energy, which is considered clean.
”This field is very attractive to investors. It is commonly assumed that governments in developed countries will encourage the field, as a result of which substantial growth is anticipated. Investments are available in few such companies, so Ormat’s bonds are considered an attractive investment. Ormat has made great strides up until now, and I believe that the company’s business will experience enormous growth in the future.”
The prospectus that Ormat published for the issue was long and detailed as thick as a telephone directory. “The deal was very complicated,” Rosen explains. “The issue was designated to pay for five projects. The prospectus had to go into great detail regarding each of the projects.
”Each project was described in its financial and engineering aspects, including the smallest details. At Lehman Brothers, we have an investment banker named John Veech, who has developed an innovative structure for putting together a deal of this sort.
”It’s the first deal of its kind in Israel, in which a single bond issue finances several projects. A company issuing bonds to finance a project usually designates the money for a single project. Ormat’s issue is designed to finance five projects.”
Another deal that Lehman Brothers led, which was announced in early January, was the billion-dollar Teva bond issue. Teva recently announced it had raised a further $95 million as a result of over-subscription. The issue was the world’s largest since the beginning of 2004, and the largest ever by an Israeli company. The money was used for the $3.4 billion acquisition of Sicor.
The issue was a big success, although the bonds were priced very aggressively. It included two 20-year convertible bond series: one for $600 million, and one for $400 million. Each of the series included a conversion premium, and different nominal interest rates, with different repayment and conversion options.
The larger series was issued at a 20-26% conversion premium, at 0-0.25% dollar interest. The investors have an option to require repayment of the bond after six years. For its part, Teva has an option to repay the bond, and will do so if the series enters the share track. The premium on the second series will be 29-35%, and the interest rate will be 0.25-0.50%. Each side has a repayment option after four and a half years.
”Teva decided to split the bonds into two groups, in order to maximize demand by appealing to different groups of investors,” Rosen explains. “One group was interested in a higher interest rate, while the other was interest in a bigger premium.
”One of the important indicators of the issue’s success is the fact that in most cases, after an overnight deal, the share price falls. In Teva’s case, the share price jumped 3.4% on the day following the issue.
”The market knows Teva, and appreciates the quality of the company and its management. This was Teva’s fourth bond issue. Demand is high for the bonds that the company issues, owing to the investors’ good experience with the company.
”One of the important achievements in this deal is the fact that 60% of the bonds were purchased by long-term investors. Since bond issues are overnight deals, hedge funds are the main buyers in many cases, because hedge funds make deals quickly. They buy bonds for the short term, and sell them quickly, and are consequently considered less desirable investors. It’s usually preferable for most of the bonds to go to long-term investors, who won’t sell them shortly afterwards at a small profit.
”The fact that strong hands, i.e. long-term investors, bought 60% of Teva’s bonds was one of the main reasons why the issue was successful, and why the share price rose after the deal was completed. It should be stressed that cases in which 60% of the investors are long-term investors are usually typical of long-term deals, in which the company conducts a road show.”
How did you find those investors?
”We know Teva’s investors, and we know which ones know the company well enough to buy its bonds in an overnight deal. That’s how we knew whom to contact about the issue.”
Lehman Brothers was both the lead underwriter and the book runner for the Teva bond issue. The sub-underwriters were the Credit Suisse First Boston and Citigroup investment houses. The Bank of America, Deutsche Bank, Goldman Sachs (NYSE: GS), and Merrill Lynch investment houses also participated in the issue.
The book runner is the underwriter who assumes the entire risk. If the issue fails, he must buy all the bonds. The other underwriters receive no payment, but they are not required to buy any bonds.
Nir Epstein is managing director of Lehman Brothers Israel.
Published by Globes [online] - www.globes.co.il - on February 16, 2004