Polar Investments (TASE: PLR) announced yesterday that it was joining the race for Bezeq (TASE: BZEQ), thereby bringing the number of bidders to eight. Polar Investments is expected to own only 20% of the consortium, which includes Edmond de Rothschild Venture Capital Management and other foreign investment funds. Eight is a nice number, but it is also a very fluid number. One or more consortia may decide at the last minute not to submit forms. Another, more likely, possibility is that still unmentioned anonymous parties may join the race. In order not to go out on a limb, I will say that the number of bidders will be between five and nine, and even that is by no means certain.
The number of bidders in the first stage of the Bezeq privatization tender is definitely a pleasant surprise, and bodes well for the privatization process, which has been hanging fire for over fourteen years. On the other hand, as will be explained later, all that glitters is not gold. Many bidders at this stage does not guarantee close competition between many groups at the really decisive stage that will determine the price tag for Bezeq.
By the final stage, few bidders are expected to remain for the Government Companies Authority to deal with. A small number of consortia in a photo finish may make it difficult for the Government Companies Authority to conduct a real tender. The finish line is shaping up as April 2005, following the publication of Bezeq’s 2004 financial report. Subject to this timetable, a reasonable assumption is that the competing groups will emerge in their final form only in February-March 2005.
Who are the eight consortia expected to participate in the tender? Haim Saban, Beny Alagem, David Azrieli, IDB Holding Corp. (TASE: IDBH), Apax Partners, Vladimir Gusinsky and Ofer Nimrodi, the Markstone Capital Partners Fund, and Polar Investments. These concerns and individuals fall into several categories. One is expatriate Israelis who have made their money overseas from sources other than holdings in communications operators. This category includes Saban, who made his money in media; Alagem, who founded US computer equipment company Packard Bell; and Azrieli, who deals in commercial real estate, and specializes in shopping malls. Most of the eight are foreign investors, except for Nochi Dankner-controlled IDB Holdings and Ofer Nimrodi. They can be scrutinized for the presence of strategic investors, but that would be futile. There are none.
How many will withdraw? The million-dollar question is who will be left when the dust of speculation, maneuvering, economic analyses, and disinformation settles. It is reasonable to assume that some of the groups will withdraw at some point. Other groups are expected to combine into one. The question is which of the above-mentioned parties can lead such an alliance. Ostensibly, Haim Saban and IDB Holdings fit the bill, although they are not the only ones with the financial capacity to lead a consortium. There are other groups that will probably not be in the front row, but will join one of the emerging groups, while refraining from a dominant role. One example is Markstone, which can only put a limited amount into an individual investment.
Another possibility is that additional concerns will take part in the sale of the Bezeq controlling interest as secondary players, after the initial bids have been submitted. Bear in mind that any group formed needs an Israeli partner, which must own at least 19% of the shares. Alagem, Saban, and Azrieli are not considered Israelis for this purpose. The first bet on the identity of those likely to join later brings us back to parties mentioned in the recent past in connection with the acquisition of Bezeq, such as Israel Corp. (TASE: ILCO) and Shaul Alovitz’s Eurocom Communications. It has been often said that Alovitz has always had eyes for Bezeq, but he apparently lacks the necessary financial capacity to lead a group competing in the tender. It cannot be ruled out, however, that he is already negotiating with parties that will make a bid tomorrow.
The current conventional wisdom is that only two groups, and perhaps only one, will remain at the end of the race. This prediction indicates how difficult it is to sell Bezeq, and the great difference between a declaration of intent and an actual decision by each one of the consortia to risk its money by investing it in Bezeq. If only one group reaches the finish line, things will be very difficult for the Government Companies Authority. In this case, there will be no real competition. It will be much more difficult to explain the sale if the price is lower than the market value and the premium that the purchase of the Bezeq controlling interest should pay in theory.
Disclosure
A bid to acquire Bezeq submitted to the Government Companies Authority includes hundreds of pages of particulars and small details, including the personal fortune and location of parties at interest in each of the consortia. This is a very unpleasant feature for the bidders, who carefully preserve the privacy of their companies, and their own personal privacy. That fact that each of these parties nevertheless decided to continue the process shows a certain degree of sincerity in their interest in Bezeq.
Furthermore, such a process also costs the bidders quite a lot of money. The legal and business costs of the tender for each participant are estimated at $2 million at this stage. Continuing to the end of the tender will require almost $10 million, since obtaining financing is also costly.
Price
Betting on the sale price for the controlling core in Bezeq is even more risky than betting on who will bid. First of all, the consortia do not have to submit a price tag yet; that happens only in the final stage of the tender. There are so many uncertain factors connected with Bezeq that make it very difficult to carry out any kind of valuing for the company. The tender participants are doing their best, with the help of consultants hired to construct a model for the purpose. Any such model will include quite a few variables that are very hard to deal with.
Investors intensely dislike situations like this. They obviously prefer having as accurate as possible an estimate for the value of the asset that they are buying. For example, it is still unclear what regulators will have to say about the voice over Internet protocol (VoIP) market in Israel, the fate of Bezeq’s structural separation, and when the limitations imposed on the pricing of Bezeq’s services and its ability to offer bargains will be removed. The lack of knowledge is creating a substantial discount for Bezeq.
Government Companies Authority director Eyal Gabbai is trying very hard, with considerable success, to reduce investors’ level of uncertainty about Bezeq. Although the formulation is vague, the new Bezeq license has been signed. The issue of the company’s real estate properties has been settled, and its disputes with the General Security Services have been dealt with. Beyond that, publication of Bezeq’s prospectus, for which the Government Companies Authority pushed hard, and which was officially scheduled for the unsuccessful issue of Bezeq shares on the Tel Aviv Stock Exchange, has become a marketing tool, and has boosted the changes of privatizing the company.
The information room to be opened on the second stage of the Bezeq tender is likely to dissipate some of the uncertainty. The information is likely to include further details about Bezeq’s real estate, labor agreements, and other matters. It is important to keep in mind that investors expect a great deal more. The full report for Pele-Phone, which constitutes an extremely significant part of Bezeq’s portfolio, is not published. Investors also expect management reports, budgets, and additional confidential commercial material. It is undoubtedly unpleasant for Bezeq to disclose its secrets, in effect, to the entire market. A typical example of the problems caused by such disclosure is that Nochi Dankner, who has holdings in Cellcom, a significant competitor of Bezeq, will be able to read Bezeq’s most detailed reports.
Another factor that will greatly affect the price is the final number of bidders in the tender. The more bidders, the greater the competition, and the higher the price. While it was once thought that the bidders for the controlling interest would offer a premium on the market price, it is now thought that the bids will reflect a discount on that price, since gaining control of Bezeq will force them to buy a large quantity of Bezeq shares, thereby increasing their risk. This may be a result of an attempt by the bidders to cool the competition between themselves by indicating a trend to each other, and to the Government Companies Authority.
The Government Companies Authority is attentive to the desires of the potential bidders. “The goal is to stabilize the price level, for better or worse,” Gabbai says. “It’s very difficult to show in an Excel spreadsheet how you can make back an investment in Bezeq.”
The bidders for Bezeq
Haim Saban: A former Israeli, a media tycoon and won of the wealthiest men in the US. Saban, 59, became a billionaire thanks to the Power Rangers franchise that was later merged with Ruper Murdoch's News Corp. (NYSE:NWS;NWS.A, ASX:NCP) and sold to Walt Disney Holding Co. (NYSE:DIS) in 2001 for $5.3 billion. Saban has strong political ties in Hollywood, and is one of the largest donors to the Democratic Party and its candidate for president, Senator John Kerry. It has been reported that Saban recently hosted Kerry at his home in Beverly Hills. It has also been reported that Saban spends hours on the phone with Prime Minister Ariel Sharon and has vacationed with former US President Bill Clinton. Saban recently told "The New York Times", "I am a man with one interest, and that interest is Israel." This might be the motive for his involvement in Bezeq. Saban recently acquired 22% of Channel 2 franchisee Kehset Broadcasting.
Beny Alagem: A cofounder and former CEO of PC maker Packard Bell Electronics Inc. Alagem founded Packard Bell in 1986 with Jason Barzilay and Alex Sandel, and made the company into one of the largest PC manufacturers in the early 1990s. Tough competition from Dell Computer (Nasdaq:DELL) and Hewlett-Packard (NYSE:HPQ) hurt Packard Bell's profits, and it was sold to Japanese computer giant NEC (TSE:6701; Nasdaq:NIPNY; LSE:NEC; XETRA; AEX:NIPN). Alagem later bought the computer brand AST from Samsung (KSE:00830). Alagem now focuses on real estate, buying office properties in Los Angeles and its environs through his investment company Alagem Capital.
David Azrieli: The 81-year old mall tycoon is one of the ten richest men in Canada, reportedly worth $1.4 billion. In Israel he is best known for the eponymous mall and skyscrapers he built in Tel Aviv. Recently, Azrieli was about to buy Eliezer Fishman's holding in Israel Credit Cards-Cal (ICC-Cal), but the deal was called off. Bezeq is one of the Azrieli Towers' largest tenants.
IDB Holding Corp. (TASE:IDBH): Everything possible has already been written about this company, controlled by Nochi Dankner. Since he acquired it just over a year ago, IDB has become a dynamic holding company and one of the largest in Israel. IDB Holdings has significant communications interests, which will cause it plenty of problems en route to acquiring Bezeq. Dankner will have to decide whether to increase his stake in wireless telephony Cellcom (25% through Discount Investment Corporation (TASE:DISI)) and give up his Bezeq dream, or to go for Bezeq and give up Cellcom. He also indirectly owns international calls carriers Barak and Globcall, holdings he will have to sell if he wins the Bezeq tender.
Apax Partners: London-bssed Apax manages €12 billion in funds for investment institutions worldwide. It handles many buy-out transactions. Apax also has considerable experience in telecommunications. It is one of the world's largest private investment groups. Apax Europe has allocated $600 million for investment in Israel through its fourth and fifth funds, which manage $5 billion. Apax has invested in 37 Israeli software, electronic components and systems, life sciences, medical equipment and services, and media companies.
Vladimir Gusinsky and Ofer Nimrodi: Gusinsky, the Russian media tycoon and Nimrodi, the controlling shareholder in Ma'ariv Holdings (TASE:MARV), are again cooperating. Their target this time is Bezeq. Sources involved in the Bezeq privatization don’t know how to deal with this duo, nor is clear that they are serious. Nimrodi told "Globes", "I believe that if the other investor due to join the consortium decides to withdraw, I'll recommend not to go ahead and bid for Bezeq. We're not dreaming of going for Bezeq independently. Each of the parties (Gusinky and Nimrodi) will put down $80-100 million for the controlling interest in Bezeq, while the third investor will add $200-250 million."
Markstone Capital Partners Fund: Markstone was founded by US businessman Elliott B. Broidy, former Lehman Brothers Israel manager Ron Lubash, and former Arison Holdings VP Amir Kess. Markstone has so far raised $500 million, mostly from large US enterprises for an investment fund that will specialize in established and solid Israeli companies. Markstone has not yet made any investments, but its name has come up in quite a few possible deals in the Israeli market. The company's bylaws stipulate that it can invest only up to 20% of its equity in a single investment, which means that even if it soon completes the capital raising soon, it can invest only $100 million in Bezeq. However, Markstone can ask its investors to join it in making private investments in Bezeq.
Published by Globes [online] - www.globes.co.il - on October 28, 2004