After yesterday's dramatic announcement by U. Dori Construction Ltd. (TASE: DRCN) that erroneous estimates in its construction project would lead to second quarter losses totaling NIS 250-350, its parent company Dori Group Ltd. (TASE: DORI), a unit of Gazit-Globe Ltd. (NYSE: GZT; TASE: GLOB), controlled by Chaim Katzman and Dori Segal, announced to the stock exchange today that it intended to "formulate a plan designed to strengthen the company's capital structure and cash flow."
Accordingly, U. Dori Costruction stated that it "is examining various possibilities, among them a renewal of the offer to purchase for the company's shares (which failed a month ago, E. P. ) or a merger into the parent company, Dori Group, in a fashion, at a price, and on terms that will be determined after the release of the second quarter financials. An offer to purchase for the bonds of U. Dori Construction is also being examined, at a price that will not be below par value, all taking into consideration the need for the group and U. Dori Construction to abide by their financial covenants and meet their obligations."
The company said that the completion of the planned investment by the controlling shareholder, Gazit Globe, and the execution of the above plan, "are subject to the procedures required under law and to the decisions of the authorized organs of the company, and at this stage there is no certainty that they will be completed.
behind today's announcement lies a demand from the Israel Securities Authority that the company should publish information on its expected financial situation and its ability to meet repayments to its creditors.
U. Dori Construction shares rose by 13% today, following its announcement of a rescue plan, after tumbling 43% yesterday.
Yesterday Gazit-Globe announced that it would make available NIS 200 million that would strengthen Dori Group's capital structure. It will inject NIS 130 million through a private placement of Dori Group shares at their price at the end of last week, such that Gazit Globe's stake in Dori Group will rise to 85%. A further NIS 70 million will be available to Dori Group as the need arises from time to time, on terms to be agreed between the parties.
This is on top of NIS 250 million that Gazit Globe has made available to U. Dori Construction in recent months through an owner's loan. Gazit Globe intends to convert NIS 125 million of the loan into shares in U. Dori Construction, again at the share price at the end of last week.
Capital market sources to whom we spoke today told "Globes", "There's no need to go crazy now and blow the house down. Let Chaim Katzman get on with the job." And indeed the assessment is that Katzman and Segal, who have deep pockets, will do what is necessary to regularize the unfortunate situation in the subsidiary and will not allow it to get out of control.
U. Dori Construction shocked investors yesterday when it reported massive losses that are expected to put it into a position of negative shareholders’ equity, and to cause it to be in breach of covenants between the company and its creditors.
After Dori Construction recorded a loss of NIS 28 million, due to unanticipated expenses and mistakes in project budget estimates, yesterday it became clear that that was just the beginning. This follows the company’s report that in the second quarter it expects massive losses totaling NIS 250-350 million.
Dori Construction, which operates as a contractor for residential, office, industrial, and commercial construction projects, announced yesterday morning that during the course of a comprehensive investigation underway at the company it became clear that “there is a significant discrepancy between the cost estimates and the expected revenue for company projects that are underway and estimates that the company had until now, in the vicinity of NIS 250 million to NIS 350 million.” Dori Construction explained that this discrepancy “is expected to cause a loss to the company’s shareholders of a similar amount.”
The loss is expected to put Dori Construction into a position of negative shareholders’ equity (the company’s shareholders’ equity was NIS 191 million at the end of March) and to lead to a breach of its financial covenants with its creditors.
The current investigation underway at the company, which has not yet been concluded, analyzes all the existing estimates for its projects. These operations total NIS 5 billion and include some that have been completed, as well as some that are still underway. It appears that the mistakes in the estimates were wide ranging, and affect a great many projects. Therefore, it seems that most of the damage may be attributed to management decisions.
The stock crashes
Following the severe report, Dori Construction shares dropped 45%, to a market cap of less than NIS 50 million. Parent company, Dori Group, managed by Ronen Ashkenazi (who also serves as chairman of Dori Construction), which holds 60% of Dori Construction, will also see its shareholders’ equity shrink, by NIS 150-210 million (from NIS 296 million at the end of the first quarter). Dori Group’s stock dropped 23% yesterday.
Dori Group’s controlling shareholder, Gazit-Globe Ltd., will also be affected by the massive write-off, and the expectation is that its second quarter profits will drop by NIS 91-127 million, and that its shareholders’ equity will drop by NIS 118-201 million. This is relatively marginal damage for a company that is worth more than NIS 8 billion, and has a similar shareholders’ equity. Because of this, the company’s shares were down just 2%.
The bond series of both Dori Group companies traded down sharply yesterday as well, and dropped 10% over the course of the day, but their yields were still single digit. Dori Group’s bond liabilities total NIS 563 million, and Dori Construction’s bond liabilities total NIS 80 million.
The CEO resigned a month ago
Following the decline in Dori Construction’s situation over recent months, CEO Ariel Wilensky resigned, fifteen months after replacing Yehuda Bar-On, who had held the position for eighteen months. In recent weeks, former CEO Assaf Mor, who left the company three years ago, has reassumed the position.
Dori Group hopes that Mor, who has worked with company founder Uri Dori since the early 1990s, will be able to help bring about a change of direction for the company, after the current affair has been dealt with.
The financial institution with the largest stake in Dori Construction is Harel Insurance Investments and Financial Services Ltd. (TASE: HARL), which holds 12% of the company’s shares, and the institutional investor with the largest stake in Dori Group is Psagot Investment House Ltd., which holds 13% of the capital.
Published by Globes [online], Israel business news - www.globes-online.com - on July 28, 2014
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