Holding company Elbit Imaging today announced that it had signed a memorandum of understanding to sell 5-50% of the shares in Elbit Medical Technologies, its subsidiary, which has a NIS 238 million market cap, in order to repay its NIS 290 million bond debt, specifically its Series 9 bonds scheduled for repayment in November 2019. Elbit Medical, a medical devices spinoff from Elbit Imaging, has holdings in Gamida Cell (18%) and InSightec (22%). Elbit Imaging owns 89% of Elbit Medical's shares.

Elbit Medical, founded in 2010, has been funded from the beginning through owner's loans from Elbit Imaging. A few months ago, it raised NIS 150 million in debt in order to repay these loans, so that Elbit Imaging would be able to service its debt. Elbit Imaging has already repaid NIS 57 million of its debt. The rest of the money repaid to Elbit Imaging by Elbit Medical is enough to cover some of Elbit Imaging's Series 9 bond debt, but not all of it.

Buyback of Series 9 bonds

If and when the deal goes through, the Elbit Medical shares will be sold at NIS 0.96 per share, 6% lower than the market price on the date of the announcement. Through this deal, Elbit Imaging will be able to add NIS 10-100 million of the amount it is repaying to its bond creditors. Simultaneously with the announcement of its intention to sell shares in Elbit Medical, Elbit Imaging announced a plan to buy back its Series 9 bonds starting on August 26 for up to NIS 70 million. The purchases will be carried out through the Tel Aviv Stock Exchange (TASE) or in private deals. Elbit Imaging is also considering additional deals.

Elbit Imaging's share price was up 3% as of web posting, pushing the company's market cap up to NIS 78 million, and its bonds were up 4.3%. The company's share price rose despite the discount represented by the deal, apparently because investors believe that the scenario of an orderly sale of shares in Elbit Medical to a third party is preferable to a sale of the shares on the market shortly before the due date for the Series 9 bonds.

Elbit Imaging's main asset

The prospective buyer for Elbit Imaging's shares in Elbit Medical is Exigent Capital, which already holds shares in InSightec, one of Elbit Medical's two main assets. It appears that Exigent was interested mainly in more exposure to InSightec, but the investment round in the company was closed at $150 million (at a company value of $550 million). InSightec deals in minimally invasive surgery though focused ultrasound. The agreement between Elbit Imaging and Exigent allows Elbit Imaging to accept an alternative offer to buy the shares if a higher offer is made during the next three months.

Elbit Medical is managed by CEO Yael Naftali and chairperson Ron Hadassi. The company's raised more than expected in its recent bond debt issue and has already repaid part of it, a clear signal that it has no need of cash at the moment. Elbit Medical does not intend to increase, and possibly not to maintain, its shares in its held companies, nor does it intend to make additional investments. At the same time, it is possible that if Exigent becomes Elbit Medical's controlling shareholder, this strategy could change.

The recent financing rounds by Gamida Cell and InSightec were held at company values of $160 million and $500 million, respectively, meaning that Elbit Medical's stakes in the two companies are worth an aggregate $149 million (NIS 536 million), from which the debt must be deducted. In a recent analysis published by Edison, it estimated Elbit Medical's value at NIS 407 million net of debt.

Elbit Medical is the main asset of Elbit Imaging. The controlling interest in Elbit Imaging passed in early 2014 from Motti Zisser to the company's bondholders, headed by foreign funds York and DK Partners under a debt settlement that included a NIS 1.8 billion debt writeoff. Elbit Imaging chairperson and CEO Ron Hadassi has managed the company since the debt arrangement.