"Globes": Eduardo Elsztain, you began your IDB adventure less than seven years ago, and have since injected over NIS 3 billion. You have faced regulatory challenges such as the Concentration Law, and conflict with bondholders who have raised basic questions about repayment of the company's debt. Are you sorry you got involved?
Eduardo Elsztain: "The best part of my life began when I invested in Israel. Over the years, I've invested in Argentina, Brazil, Venezuela, Chile, Peru, Russia, Ukraine, Australia, and the US, but the investment in Israel is an old dream, and something special for me. I come here every month, my children came here for a while, and became more involved in Israeli society. I like it very much."
You describe things that are good for the heart and soul, but was this a smart investment from a business standpoint?
"I think that I'll calculate my return on this investment when I have great-grandchildren. We have wonderful assets, and people are always asking me if I'm sorry that I invested. I tell them, 'I'm not; thank God I did it.' If I measure the amount I invested by market value, the value will be less than the investment. But I know that the things I bought are like a work of art that you leave for the coming generations. When you look at it, you don't ask every day what its market value is.
"If you want to calculate for me 'how much I have lost up until now,' you don't have to ask me - look at our balance sheets. We declare everything that we lose. But I don't believe that what we bought was a mistake. I still believe that Israel is a wonderful place to invest in. The companies - Property and Building, Bayside Land Corporation, Shufersal, Cellcom, Elron Electronic industries - are good, and will get better under our management. I won't know know the return on this investment; my grandchildren will."
"People who got NIS 20 billion want more and more"
No one doubts Elsztain's infinite commitment to IDB, which some find inexplicable from a business perspective. It started in 2013, when then-IDB controlling shareholder Nochi Dankner tried to save his frighteningly leveraged and money-losing business, and contacted Elsztain. Elsztain put NIS 100 million into the business, but the partnership with Dankner then went sour, and Elsztain hooked up with Moti Ben-Moshe to buy the concern from the court as part of a debt settlement. The buyers took an enormous debt on themselves - NIS 33 billion, including to the bondholders.
Elsztain bought out Ben-Moshe in 2015 because of disputes about management of the company, the main problem being that, in contrast to Elsztain, Ben-Moshe did not want to inject more money.
IDB, however, still needs Elsztain's dedication and commitment. In August this year, IDB's second quarter reports almost resulted in a going concern warning, after which the company's largest creditors, holders of its Series 9 bonds (NIS 1.2 billion in debt), expressed concern, and Elsztain promised to inject NIS 210 million into IDB, in three annual payments of NIS 70 million each in 2019-2021.
This money, like the earlier sums, is being paid by Inversiones y Representaciones Sociedad Anónima (IRSA). IRSA is Elsztain's empire - the source of the money that is enabling him to realize his dream of making a significant investment in Israel. IRSA, the largest commercial centers company in Argentina, also owns office buildings and hotels, as well US real estate, such as the Lipstick Building. It is listed on the New York Stock Exchange and Argentina Stock Market. Elsztain is IRSA's controlling shareholder through Cresud, another company under his control, whose current business is farms in Argentina, Paraguay, Bolivia, and Brazil. IRSA owns, indirectly but fully, Dolphin Netherlands BV, which controls IDB Development (100%) and Discount Investment Corporation (83%).
Today's IRSA, however, is not the same company it was when it acquired IDB, among other things because of the investment in IDB, which has generated no profits so far, to say the least, but also because it is an Argentinian company. The severe economic crisis in Argentina, the change of government in the elections in October from Mauricio Macri, regarded as rightwing and liberal, to Alberto Fernández, representative of the Peronists, regarded as a populist leftist who favors a more closed economy and is less friendly to business, led to a loss of confidence on the part of investors in Argentinian companies. IRSA, for example, has lost 60% of its value, its bonds are trading at yields of over 10%, and the question has arisen whether it will be able and willing to continue supporting IDB.
Meanwhile, there are more pressing things than what will happen with the great-grandchildren. IDB's debt to its bondholders is still almost NIS 3 billion. A large proportion of it must be paid in 2022, and the bondholders are worried about whether you will have the wherewithal to pay them.
"We have already reduced IDB's leverage, which was NIS 33 billion, to less than half of that, and it will be even less after we relinquish control of Shufersal and Bayside Land Corporation. We paid all of the company's debt exactly on time, and at the same time, we continued paying salaries to 25,000 people and the obligations to the banks. We did this in both good times and bad times.
"I see no problem for us in continuing to meet our commitments. People don't ask me how I paid NIS 20 billion in the past seven years. They only ask me how I'll go on paying."
What worries the bondholders is that up until now, you paid them will the support of IRSA, and they're asking whether you will be able to continue doing so.
""We sold only one company in the past seven years, Makhteshim Agan (Adama), and we're growing the rest of the companies (actually, Elsztain did sell half of the holding in Shufersal, and was forced to sell most of the holding in Clal Insurance, S.L.). The reason that we kept them was that they have excellent value, but we're not in a situation in which we can't sell assets. Just as we put NIS 3 billion into IDB, we undertook to put in NIS 210 million more, because they (holders of the Series 9 bonds) came and told us that they were worried."
They were not worried without cause. The company faced a going concern warning.
"These are people who got NIS 20 billion, and they want more and more. When we entered IDB, the company was under absolute stress. The bonds collapsed and the company was bankrupt. After they went to court and the bond fell to 30% of its value, they went to Argentina to talk to me. They said, 'We need you.' Since they, they have already collected more than what the market cap was, and now they say they're worried. They aren't worried. They want more. We paid our bonds (this refers to IRSA's bonds, S.L.) for three decades - not just in Israel, but also in Argentina and Brazil. We're an international company, and we never had a debt that wasn't paid."
Will you be able to continue relying on IRSA to continue meeting IDB's obligations in the future?
"As far as I'm concerned, IDB doesn't need any more financing in order to meet its obligations."
It sounds like you think there is a mentality here of taking as much as possible.
"This is very Jewish. Here in Israel, everyone wants a little more. It's a 'give me, give me, give me' culture, and they know how to do it with the help of the press and journalists."
"When Sholem Lapidot and Gil Kotler left, I was in a panic"
A personal drama took place at IDB last June. Sholem Lapidot, Elsztain's protégé, whom he brought from Argentina and appointed as CEO of IDB and Discount Investment, announced that he was resigning his position. The announcement was a bolt out of the blue, and some attributed it to excessive involvement by Elsztain, who even bought an apartment on Rothschild Boulevard in Tel Aviv in order to closely oversee the business. A week later, IDB and Discount Investment CFO Gil Kotler announced that he was leaving to join Delek Group.
What happened between you and Sholem Lapidot?
"He worked with us for seven years and learned a lot, and then he told me that he wanted to try working independently, to make his own way. I thought that it was good for him. He's very professional, a smart man, and a good man."
They say that Sholem didn't like you getting more involved, that you moved here, and were hemming him in as a manager.
"I never heard such a complaint from him. I invested money and I'm involved in any business I invest in. I'm not a passive investor. I came to Israel every month for the past seven years, and sometimes, depending on the depth of the crisis, I had to stay for the entire month. My wife used to call and ask, 'When are you coming back?' Last year, I persuaded my wife and daughter to come here for six months, and I rented an apartment on Rothschild Boulevard. But I don't think that this is what influenced Sholem."
What about Kotler's departture?
"What caused this earthquake was that Tshuva offered Kotler a chance at that exact time to move to the US, and Kotler had already told me that he wanted to move to the US for two or three years."
Two key people left at the same time. That's not easy.
"I was in a panic at the time. When two key people in a public company leave at the same time, the market reacts negatively, regardless of the circumstances.
"It took me several months to make a thorough survey of who should be candidates (for CEO). I was very surprised to see the quality of the people who wanted the job. I chose Eran Saar, who had the abilities required to be in a holding company and a financial background (Saar was formerly CEO of Aramco, S.L.), and he was the youngest of the people I considered. I prefer people looking for a challenge to people with a background."
"I can't even drink a cup of coffee at Clal Insurance"
Elsztain and IDB starred in many headlines because of claims that he was trying to bypass regulation concerning flattening of the ownership pyramid, Clal Insurance, and appointment of directors. The relevant regulator rejected deals that he wanted to carry out more than once, but he did not give up.
It looks to me as though you are less than happy about regulation here.
"We're an international company, and our rule is first of all to fulfill the legal requirements in every country, even if these aren't the laws that I would have chosen. Am I glad that Cellcom was turned down when it wanted to buy Golan Telecom? No. Am I glad that I didn't get approval for doing the deal with Bezeq (IDB tried last year to compete for the acquisition of Bezeq, and was willing to change its holding in Cellcom as required, S.L.)? No. Am I glad that I didn't get approval for merging El Al with Israir? No. Am I glad that we found three Chinese companies interested in buying Clal Insurance at a good price, and they refused to approve any of them? Of course not. But I'm not the person who judges whether a law is good or not."
Your views are well known, and it is known that you tried for a long time to change the ruling that you cannot own Clal Insurance. In the coming months, you will have to reduce your holding in the company to 5%.
"I think that Israelis know better than I do why I was approved (as an owner of Clal Insurance) when I came here with Nochi, but not after that. But I'm not complaining about that. I don't think that there are 100 people willing to come and invest in Israel. It's an economy with very difficult regulation. On the other hand, Clal Insurance accepted partners like the Arkin family, Yakir Gabay, and Eyal Lapidot (all of whom recently bought the company's shares, S.L.) - this shows me how strong the company is."
In one of its most profitable assets, supermarket chain Shufersal, Discount Investment reduced its holding to 26%. It had to do this because of cash flow, not because of the Promotion of Competition and Reduction of Concentration Law. Relinquishing control of Shufersal, however, will enable Shufersal to hold an offering for its subsidiary, Shufersal Real Estate. "Do you know how many Israelis would be delighted to hold 26% of Shufersal?", Elsztain says in response. "This a company that does wonderful business, with the best locations in every city in Israel."
In contrast to Shufersal, Cellcom is costing Discount Investment losses of NIS 500 million.
"The entire sector is losing money. A change is necessary. There are many companies, the market is small, and there was a fall of over 90% in the price over the past decade. Sometimes a competitive environment is good, but sometimes it prevents infrastructure investments, and Cellcom went on investing in infrastructure, and it has the best infrastructure."
Are you angry at Nochi Dankner?
"He's one of the most charming people I ever met. He's a good man who made mistakes. I'll be very glad when he's released from prison. There is no bad blood between us. It's true that I lost the money I gave him, but I don't think that he misled me. He himself made a mistake."
The question is whether you made a mistake later. As you say, your assets are wonderful, but they are still worth far less than the debt. IDB had a NIS 409 million deficit on shareholders' equity in the last quarter and an asset value of minus NIS 300 million.
"This equation is an arithmetic trick that everyone does, as if they were really concerned about me. I hear them and say, 'What are they so worried about?'"
Aren't you worried?
"I was born in a crisis. Let me tell you about my 40 years of work. I began working with no cash in the company. The family company had a debt of over $25 million. Real estate prices tumbled 90% because of the Falklands War, and the bank sent us a letter saying that we weren't meeting our payments, that we were in default. That was a real default, not like here, when bondholders worry about how they will be paid two years from now.
At that time, I became friendly with the Lubavitcher Rebbe's emissary in Buenos Aires. He asked me, 'Eduardo, how are you?' I answered, 'I'm a little worried. I have a large debt, I have no cash flow, and the bank is sending me letters.' He said, 'Don't worry, solve a little each day.' Since then, I have weathered the crises of 1982, 1989, 1995, 1997, 2001, 2008, 2012, 2015, and now the current one. So, here also, I'm not worried; I take care to do the right things."
But do you have a coherent plan for the right things to do, for example for 2022, when you have to make a large debt payment?
"We have Plan A and Plan B. We have scenarios for every possible crisis."
Do you want to share it, or is it a secret?
"Everything is secret (laughs). Israelis want to know your plans ahead of time, and to take short positions and to buy and sell. Our commitment to the company has been stable for seven years, and we have the strength to continue it. This is a question that repeatedly arises, and I'm still answering it."
Still, there is a negative attitude towards you in the capital markets, as there is in general about investment in Argentinian companies in this period. How do you know that the crisis won't worsen? Peronism is not terribly friendly to business.
"When I began my career in the 1980s, Carlos Menem, a Peronist of Syrian origin, was elected president. They said that he was against business, that he would make the lives of Jews impossible. I thought then what people in Argentina are saying now - that it was necessary to go elsewhere. I had my ten best years in business in that period. I bought IRSA then for $120,000, and raised billions of dollars in the international markets, because he opened up the economy. I have no idea what the new administration is going to do, but I'm more optimistic than many people. I believe that they won't be against business if they want the economy to grow."
When you came to Israel, it was said that you actually have partners in IFISA, the private company at the head of your business pyramid. They mentioned names like George Soros and Michael Steinhardt. Steinhardt even told "Globes" that he had invested in you.
"Michael is a shareholder. I say that because he has already revealed it. There are other investors, but why should I list their names? In any case, I'm the main shareholder."
Published by Globes, Israel business news - en.globes.co.il - on December 9, 2019
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