A deal too far for Yitzhak Tshuva?

Yitzhak Tshuva Photo: Tamar Matsafi

Meitav Dash analyst Eran Yunger: The acquisition of Chevron North Sea creates a very challenging situation for Delek Group.

Shares in Yitzhak Tshuva's Delek Group Ltd. (TASE: DLEKG) continued to lose altitude today, falling a further 2.3% to complete a 17% drop since the group announced that its subsidiary Ithaca had signed an agreement to buy CNSL (Chevron North Sea Limited) from US energy giant Chevron for some $2 billion (the amount is expected to be $1.65 billion when the deal closes). CNSL holds licenses to produce gas and oil in the North Sea, and its main assets are ten producing oil and gas fields and an exploration license.

"From the beginning, after Delek announced the deal with Chevron, the market received it hesitantly, and then came Ithaca's debt-raising, which was not very successful. Add to that natural gas prices, which have fallen recently, oil prices, which are not climbing, and the report by Midroog, which announced on July 11 that it was examining the deal and Delek Group's credit rating - all these factors have contributed to the negative atmosphere around Delek's shares in the past two weeks," says Meitav Dash senior foreign equity analyst Eran Yunger, talking to "Globes".

"The volatility in oil prices," he says, "has various implications - for the cash flow that the reservoir will generate in the future, of course, and also for the cost of hedge transactions that Delek will make in the future. The lower the oil price, the higher the cost of hedging. But above all, what has had an effect is the $200 million shortfall in the bond offering, which Delek will now have to inject into Ithaca from its own resources."

Ithaca tried to raise $700 million in a bond offering last week, and succeeded in raising only $500 million. Under the terms of the offering, the principal will be repaid within five years, while the annual interest set in the auction is 9.375%.

Altogether, Delek will have to inject $800 million into Ithaca to cover the acquisition and the offering. After the bond offering was completed, Delek Group reported that it intended to inject $300-400 million into Ithaca, and to bring in a strategic partner that would make a similar investment of capital.

How will Delek Group meet these huge sums?

Yunger: "At the moment they don't have a particular asset that they are about to realize immediately. They will therefore have to complete the amount from banking or non-banking sources. That's not easy in a situation in which Delek is more leveraged than it was before. Another possibility they reported was introducing a partner into the giant deal."

Perhaps Tshuva should have gone for a more modest deal?

"Absolutely. At the end of the first quarter, Ithaca had just $26 million cash in its account, so it certainly looks as though the deal was too much for a company of Ithaca's size. On the other hand, Ithaca has a substantial tax asset, accumulated losses of $650-700 million, and that's an important part of the thinking behind the deal, because Delek Group of course plans to utilize the accumulated losses."

What can we learn from the interest rate that Ithaca is paying on the bond?

"An interest rate of more than 9% is very, very high. You have to understand that Delek needs to raise another $600-700 million, because there is also debt in Ithaca that needs to be recycled, and so the interest rate in that round will also be high - 6% or more in my opinion."

A day before the offering, Ithaca also agreed a credit line with a consortium of international banks to finance the acquisition at Libor plus 3%, making the average rate of interest to be paid on account of the deal 6.3%.

In the end, what do you think of the deal?

Yunger: "After seeing the results of the offering last week, and knowing that Delek and Ithaca have to raise a substantial amount more, we think that a very challenging situation has arisen for Delek."

Published by Globes, Israel business news - en.globes.co.il - on July 22, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Yitzhak Tshuva Photo: Tamar Matsafi
Yitzhak Tshuva Photo: Tamar Matsafi
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