Delek Group Ltd. (TASE: DLEKG), controlled by Yitzhak Tshuva, has been forced to reach a painful compromise in its dispute with Citibank concerning participation units in its energy exploration and production unit Delek Drilling LP (TASE: DEDR.L) attached in Citibank's favor. Figures published by Delek Group indicate that the compromise reached by the group with Citibank and the Dayan family, which signed an agreement to buy the attached participation units, will cost Delek Group NIS 120 million in terms of market cap.
Up until now, Delek Group held 60% of the participation units in Delek Drilling, with a market value of NIS 2.38 billion. Early last week, Delek Group revealed that participation units constituted 15% of the partnership's capital were attached in favor of Citibank in order to secure a loan, the outstanding balance of which totals $57 million.
In the weeks preceding the announcement, the balance of the loan was reduced by $100 million. Citibank nevertheless asserted a right to immediate repayment of the loan balance, citing the recent steep drop in the market value of participation units in Delek Drilling on the stock market. Delek Group decided not to comply with Citibank's demand because of the sharp decline in its cash reserves, and Citibank quickly signed an agreement to sell 12% of Delek Drilling's capital to the Dayan family in return for the $57 million (NIS 205 million) outstanding balance of the loan.
Tripartite agreement reached late at night
In response, Delek Group petitioned the court and won a temporary restraining order against completion of the deal pending a hearing of the matter, which was scheduled for tomorrow. The petition for restraining order was submitted through Adv. Pinhas Rubin and Adv. Yaron Elhawi of the Gornitzky & Co. law firm. The parties reached a tripartite agreement on Tuesday, under which the restraining order was withdrawn. The agreement stipulates that the deal between Citibank and the Dayan family for the sale of 12% of the Delek Group participation units in return for the outstanding balance of the loan will be completed. Following this deal, Delek Group will buy back 83.77 million participation units, 7% of the partnership's capital, from the Dayan family for $35.8 million (NIS 129 million) at the same participation unit price paid to Citibank by the Dayan family, plus $2.5 million. This deal will be completed tomorrow.
The tripartite agreement also states that if the Dayan family decides to sell part of its holding, Delek Energy will have first refusal rights to these participation units at a price no higher than the market value.
Delek Group will also receive the remaining 3% of the participation units held by Citibank, subject to a waiver of opposing claims. Delek Group will therefore be left with 55% of Delek Drilling when the deal is completed.
Citibank refused to wait for Delek Group
The figures in the deal show that before the dispute between the parties arose, Delek Group held 176.1 million participation units in Delek Drilling with a market value of NIS 593 million (and a higher economic value, according to Delek Group). These participation units were attached in favor of Citibank to secure Citibank's loan to Delek Group. The market value of these participation units is NIS 388 million, but Delek Group says that their economic value is higher.
The deal leaves Delek Group with 117.4 million of the participation units in Delek Drilling that were attached, with a market value of NIS 396 million, after it pays the Dayan family NIS 129 million. Had Delek Group repaid the outstanding balance of the loan from Citibank, it would have had 5% more of the participation units in Delek Drilling with a current market cap of NIS 198 million, and would not have had to pay the Dayan family NIS 129 million. Delek Group stated today, however, that it had offered to bring another financing concern to replace Citibank, and Citibank had refused to wait, so Delek Group filed a court petition for a restraining order.
Delek Group said, "The analysis is wrong. The loan is for $57 million, which was deducted from the 5% sold. The fact that Delek Group bought 7% means that it retained the cash flow that it is to receive from its assets, in addition to retaining a substantial holding in Delek Drilling. Delek Drilling purchased this 7% at a low price ($35.8 million), which in substance and economically is worth far more ($77 million, according to the current market value).
"Furthermore, even though Delek Group's legal arguments against Citibank are justified, and even though Citibank acted in bad faith and did not have the right to sell the collateral, Delek Group preferred certainty for its assets, and chose to ensure the return of 10% of Delek Drilling to the possibility of having its stake in Delek Drilling fall to 48%. Delek Group has safeguarded the assets and the cash flow from Delek Drilling, and will continue to hold 55% of Delek Drilling after the deal is completed."
Published by Globes, Israel business news - en.globes.co.il - on March 26, 2020
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