The decision yesterday by IDB Development, controlled by Eduardo Elsztain, not to accept the underwriters' first bid has proved to be successful. IDB Development today announced that it had received another binding bid to buy up to 26% of the shares in Clal Insurance on better business terms.
The same group of four underwriters is also responsible for the improved bid: Epsilon Underwriting and Issuing, Poalim IBI Management and Underwriting, Leader Underwriting, and Barak Capital. The underwriters represent a number of confidential investors (investment institutions, investment funds, and other professional investors).
IDB Development currently owns 20.3% of the shares in Clal Insurance, and is exposed to swap deals for 24% more of Clal Insurance's shares. IDB Development granted Eyal Lapidoth and Mori Arkin options in May to buy 4.99% and 3% of the shares in Clal Insurance, respectively. Lapidoth has already announced that he will exercise his options, while Arkin has yet to do so.
Arkin already bought 4.99% of Clal Insurance' shares from IDB Development, and has been waiting for approval from the Capital Market, Insurance, and Savings Authority commissioner to increase his stake beyond 5%. Arkin recently received the permit, after passing a fit and proper check by the Capital Market, Insurance, and Savings Authority. Exercising the option has now become a purely business question for him.
Actually, Arkin is authorized to increase his holding in Clal Insurance shares to over 8%, but the permit he received is classified as a holding permit, not a control permit. For this reason, as of now, he is not entitled to increase his holding in Clal Insurance by a significant percentage. If he wants to become a controlling shareholder, he will have to obtain a control permit, which will include a thorough assessment of financial soundness, in addition to the reliability checks that he already passed.
The company will choose how to receive the proceeds
According to the revised bid, IDB Development can choose to receive the proceeds in cash, in previously issued Series 9 and Series 14 long-term bonds, or a combination of the three elements, at its discretion and according to the volume of the deal that it wants to make. From a document delivered to IDB Development by the underwriters, if the payment for the shares in Clal Insurance is in bonds, the swap deal will be at NIS 52.50 per Clal Insurance share.
It was also established that the price for Series 9 bonds in a swap deal would be only NIS 0.75, while the price for Series 14 bonds would be NIS 0.79. These terms are better for IDB Development; the prices in the first bid were NIS 0.88 for Series 9 bonds and NIS 0.83 for Series 14 bonds.
It was further established that the price in a cash deal would be NIS 51.50-52 per share, compared with NIS 50 per share in the earlier bid. Under the terms of the bid, IDB Development agreed to give the group of underwriters exclusivity in the sale of its shares in Clal Insurance until September 5, on condition that the IDB Development board of directors gives final approval by Monday.
At the same time, IDB Development's board of directors will approve the bid only if its controlling shareholder, Irsa, agrees to inject additional capital into IDB Development. Earlier this week, IDB Development asked Irsa, controlled by Elsztain, for a commitment to a capital injection of at least NIS 140 million ($40 million), to be carried out in stages.
The capital injection is designed to strengthen IDB Development's equity and bolster its net asset value (NAV). IDB Development's board said that Irsa should inject NIS 70 million immediately. Elsztain previously stated that companies under his control had already injected NIS 2.7 billion into IDB Development and fellow subsidiary Discount Investment Corporation. $640 million of this was injected by Irsa.
The price of Series 9 bonds rose 2.5% to NIS 0.715 today following the announcement, compared with a par value of NIS 1.23. Series 14 bonds, whose par value is NIS 1.01, climbed over 3% to NIS 0.74, while Clal Insurance's share price rose 1% to NIS 53.40.
A cash deal for the Clal Insurance shares will provide IDB Development with liquidity, but does not general profits for it. Accepting bonds at a price significantly lower than the par value, on the other hand, generates capital gains for IDB Development, and is therefore perceived as more worthwhile in the absence of liquidity problems.
IDB Development suffers from severe liquidity problems. The company will report a NIS 418 million equity deficit in its second quarter reports, minus NIS 245 million in NAV, and 125% leverage, as of today. For this reason, IDB Development's board of directors will be unable to approve the swap deal of shares for bonds unless Irsa agrees to inject at least $20 million in the coming days. This puts the ball squarely back in the court of Irsa and Elsztain.
Irsa itself is a victim of the macroeconomic straits of the country in which it operates -Argentina. The company's market cap is $321 million, following a 61% drop this year caused by the deteriorating economic situation in Argentina and the severe peso devaluation against the dollar.
Published by Globes, Israel business news - en.globes.co.il - on August 28, 2019
© Copyright of Globes Publisher Itonut (1983) Ltd. 2019a