Israel Canada's move for Norstar turns into painful loss

Chaim Katzman  credit: Eyal Izhar
Chaim Katzman credit: Eyal Izhar

Not only has Norstar's decline caused Israel Canada to freeze its merger proposal, but it is more than NIS 100 million down on its investment.

In the past few weeks, Chaim Katzman has gone back to buying shares in Norstar (TASE: NSTR), the holding company through which he control international income-producing real estate company G City (formerly Gazit Globe) (TASE: GCT). For the time being, this is not a matter of large sums, but it indicates that, while his rival for control of the company, real estate developer Israel Canada (ISCN), controlled by Barak Rosen and Asaf Touchmair, has got cold feet, Katzman is bolstering his position and his control.

Since Norstar released its first quarter financials on May 26, Katzman has bought shares to the tune of NIS 3.5 million, and he now holds 27.6% of the voting rights in the company. Katzman also has a cooperation agreement with contractor Izac Sela, who holds 5.2% of Norstar, so that in effect he controls 32.85% of the voting rights.

Between the rise in Norstar’s share price that started in October 2021 and the declines since May this year, a control battle developed in the company, which so far has resulted in victory for Katzman, who is managing to continue controlling Norstar even after selling 11% of at the beginning of this year for NIS 192 million at a price per share of NIS 50.5, 74% higher than the current market price.

Israel Canada posted a net profit of NIS 203 million for the first quarter, but the recent declines on the market will occasion it heavy losses in the second quarter.

Altogether, at the beginning of the year, Israel Canada invested some NIS 345 million in buying 22% of Norstar, some of that, as mentioned, from Katzman himself, currently worth just NIS 230 million. This means a loss on paper of NIS 115 million, or 33% of the investment.

Following its share purchases, on April 24, Israel Canada submitted a non-binding proposal to the Norstar board to enter into negotiations on a merger between the companies whereby Israel Canada would buy all the shares in Norstar at NIS 55.5 per share, valuing the company at NIS 2 billion.

Just a month later, however, the Israel Canada board decided to "freeze the negotiations that were the subject of the proposal, in the light of the situation on the global markets". Norstar’s market cap has now fallen to NIS 1.1 billion, 45% below Israel Canada’s offer.

Norstar is in fact a leveraged holding company. Its main asset is 51.6% of the shares in G City, worth NIS 1.75 billion, after a 24% decline in the past month, against which it has debts of NIS 846 million to its bondholders.

Israel Canada saw Norstar as an easy target for taking over G City’s extensive real estate portfolio, which includes income-producing assets (mainly commercial) with 2.4 million square meters of space. After the initial investment in January this year, Israel Canada CEO Barak Rosen explained that G City was the only Israeli real estate company that had not returned to the prices of early 2020, being traded at below its shareholders’ equity, as was Norstar. Following the recent declines, the market caps of both companies are even further below their shareholders’ equities (equity multiples of 0.59 and 0.51 for G City and Norstar respectively), but are now seen as more risky, in the light of the new situation on the markets.

Accordingly, Norstar’s series 12 CPI-linked bonds have fallen 10% in the past three months, and are traded at a yield to maturity of 6.3% (more than 10% taking into account the current rate of inflation).

Israel Canada’s unlinked 7-series shekel bonds have also fallen substantially, by 5.5%, in the past three months, making it a 9% decline for the year to date. The current price reflects a 7.1% yield to maturity, while the company’s share price has fallen 35% in the past three months and 39% for the year to date, to a market cap of NIS 3.5 billion.

Gain on investment in Alrov

It should be mentioned that, alongside the losing investment in Norstar, Israel Canada is showing a large paper profit on its investment in real estate and hotels company Alrov, controlled by Alfred Akirov. In April last year, Israel Canada bought 13% of Alrov from Clal Insurance for NIS 382 million, and later increased its investment for a further NIS 40 million. The investment is now worth some NIS 600 million, so that Israel Canada is showing a gain of NIS 178 million, or 42%.

Concerning both deals, in Alrov and in Norstar, Israel Canada stressed in its financial statements that "These do not represent an integral part of the company’s business". In both deals, it states, the company identified a business opportunity, and each one was approved by the board as an ad hoc isolated deal.

Published by Globes, Israel business news - - on June 14, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Chaim Katzman  credit: Eyal Izhar
Chaim Katzman credit: Eyal Izhar
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