Idan Ofer proposes Teddy Sagi buy Oil Refineries

Teddy Sagi and Idan Ofer Photos Eyal Yizhar & PR

The Israel Corporation needs cash to pay its debts, now that Israel Chemicals is no longer a cash cow.

Sources inform "Globes" that Israel Corporation (TASE: ILCO) controlling shareholder Idan Ofer recently proposed that billionaire Teddy Sagi buy Israel Corporation's 37% stake in Oil Refineries Ltd. (TASE:ORL). A foreign investment bank took part in promoting the deal. Ofer and Sagi held a number of conversations on the subject, and as far as is known, Sagi asked to delay his decision in order to give the matter careful consideration with the help of legal advisors.

Israel Corporation said in response, "No negotiations have taken place for the sale by the company of shares in Oil Refineries. Various queries are directed to the company from time to time on various matters, from which nothing develops."

Sagi, a technology and real estate tycoon, most of whose business is in the UK, is one of Israel's leading businessmen in his amount of liquid capital. As such, he frequently receives offers to buy assets in Israel. Up until now, however, except for one substantial deal, an investment in Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) controlling shareholder B Communications Ltd. (Nasdaq:BCOM; TASE: BCOM) that he has already sold at a substantial profit, he has avoided significant investments in the local capital market.

Israel Chemicals no longer a solution to debt

Israel Corporation is in need of cash to pay its heavy debt, which totaled a gross NIS 7.5 billion as of the end of the third quarter. Up until now, the company has used its Israel Chemicals (TASE: ICL: NYSE: ICL) subsidiary as its cash cow; dividends from Israel Chemicals distributed generous dividends that did a good job of providing money for repayments of debt and principal on the debt. Recent negative developments in Israel Chemicals and the global potash market, however, have interfered with its ability to continue distributing dividends on the same scale as in the past.

In view of the situation, Israel Corporation has conducted a series of debt issues, in which it raised NIS 2 billion last year. These offerings brought the company's cash balances to NIS 3 billion as of September 30, 2016. The company also counted on repayment of a NIS 220 loan it had granted to fellow subsidiary Kenon Holdings Ltd (TASE:KEN: NYSE: KEN-WI), which had been split off from it. However, the failure of the IPO by IC Power, Kenon's only profitable company, which was to have provided the funds for repaying this loan, trumped the cards and created an immediate need for an alternative source of financing.

A sale of its shares in Oil Refineries, whose market cap is NIS 4.4 billion, giving Israel Corporation's stake a value of NIS 1.64 billion (in market value, excluding a control premium) is likely to serve as a preferred alternative instrument for generating cash for the group.

A share in demand

It should be noted that because Oil Refineries is a strategic facility of great national importance, acquiring a controlling share in it requires a special government permit. Finding a buyer for the controlling core is therefore no simple matter. At the same time, capital market sources believe that even if Sagi decides to forgo the deal, or does not win state approval for it, buyers for the Oil Refineries shares will not be lacking.

One indication of this came this very week. A package of 4% of Oil Refineries shares that David Federmann-controlled Israel Petrochemical Enterprises (TASE: PTCH), Israel Corporation's partner in the controlling Oil Refineries interest, had to sell as part of a debt arrangement was quickly distributed to investment institutions, which paid NIS 175 million for the merchandise. Furthermore, the share rose 7% above the price for the deal in the market on the distribution day. This rather rare development, which indicates the force of the demand in the stock market, even without a control premium, makes distributing the shares on the market another option for Israel Corporation.

The connection between Israel Corporation and Oil Refineries has known ups and downs throughout its long history. One of the most notorious events was the expiration of Oil Refineries license in the middle of the preceding decade, and the issue of paying the compensation demanded by Israel Corporation from the state for the former's then-26% stake in Oil Refineries. After a struggle, then-Ministry of Finance director general Nir Gilad, later CEO of Israel Corporation, decided to pay Israel Corporation NIS 677 million for its consent to the measure - a price reflecting a NIS 2.2 billion value for Oil Refineries, which then owned two oil refineries: one in Haifa and one in Ashdod.

After the state bought Israel Corporation's Oil Refineries shares, a split took place. A tender was issued for the oil refinery in Ashdod, and was sold for NIS 3.5 billion to Paz Oil Company Ltd. (TASE:PZOL), controlled by Zadik Bino, following an aggressive pricing procedure. An offering under the name Oil Refineries was held for the oil refinery in Haifa in February 2007.

This, however, was not the end of the story for Israel Corporation. The Ofer family, which wanted to keep a foothold in Israel's oil refining industry, joined the Israel Petrochemical group (controlled by David Federman) one day before the deadline for bids in the offering tender. This combination of forces enabled the group to make a high offer in the tender, disposing of a third bidder, Africa-Israel Investments Ltd. (TASE:AFIL) controlling shareholder Lev Leviev, in the process. Israel Corporation and Israel Petrochemical, which wanted to ensure their control, submitted bids at a high company value of NIS 6.6 billion for Oil Refineries.

Revenue and profits plummeted

Oil Refineries' revenue totaled $3.1 billion in the first nine months of 2016, down 28.7%, compared with the corresponding period in 2015. Net profit amounted to $68 million, a drop of 77.7%, compared with the corresponding period in 2015.

Despite the company's relatively poor third quarter results, the Oil Refineries board of directors decided to distribute an $85 million dividend, the company's first since 2010.

When the company's financial results were published, Oil Refineries CEO Avner Maimon said, "The refining profit margin fell during the quarter, mainly due to the renovations, which included a shutdown of key facilities on the refining premises. The renovations were designed to preserve and improve the facility's efficiency and reliability. Despite the shutdown, Oil Refineries finished the quarter with a $70 million EBITDA, an increase in equity, and a positive operating cash flow. Oil Refineries recently completed a significant refinancing measure, and signed an agreement with the banks to raise $355 million on improved terms, in comparison with the previous agreement, thereby providing the company with a high degree of financial flexibility for its business needs. This in effect complements the financial merger of the companies in the group."

Published by Globes [online], Israel Business News - - on February 9, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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Teddy Sagi and Idan Ofer Photos Eyal Yizhar & PR
Teddy Sagi and Idan Ofer Photos Eyal Yizhar & PR
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