Keystone Infrastructure Fund (TASE: KSTN) is preparing to exercise its option to buy the remaining 40% stake in the Egged bus company from the hundreds of members that own the shares. Keystone notified the Tel Aviv Stock Exchange that together with its partners the Teachers and Kindergarten Teachers Fund it has reached a framework agreement to receive a credit line of up to NIS 1 billion, which it has signed with banks led by Bank Hapoalim and Israel Discount Bank.
The framework agreement will be in effect until February 2025. The estimated purchase amount, assuming all Egged shareholders choose to exercise the option and sell, is expected to be NIS 1.8 billion after deducting dividends and adjusting interest and linkage to inflation. Assuming maximum exercising of the option, Keystone and its partner will have to finance from their own sources about NIS 800 million. The exercise price of the option reflects the value of Egged at the time of the original purchase (NIS 4.8 billion), less the distribution of dividends until the exercise of the option plus interest and inflation.
In the first stage of the deal, which was completed in October 2022, Keystone and the Teachers and Kindergarten Teachers Fund paid NIS 2.9 billion for 60% of Egged's shares. On average, each of the 1,300 shareholders in Egged received about NIS 2.3 million. Now, assuming the realization of the balance of all the shares in the second stage, on average each member will receive an additional NIS 1.38 million for a total of about NIS 3.7 million (gross, before tax).
Since completing buying control of Egged, Keystone has raised Egged's value upwards in its book to NIS 5.65 billion (about 18% above the purchase value). At the same time, Egged has since distributed dividends totaling NIS 630 million, of which 60% went to the partnership (Keystone owns 80% of the partnership and the Teachers and Kindergarten Teachers Fund 20%). The dividends were used, among other things, to pay off the debt to the banks financing the first phase of the purchase, Bank Leumi and Mizrahi Tefahot Bank, and the debt to them currently stands at NIS 1.2 billion.
Last year Egged filed a request with the court to allow distribution of a special NIS 500 million dividend to shareholders. Following opposition to the move, it was finally agreed on the distribution of a regular dividend of NIS 110 million, and a cut the capital reduction request to NIS 350 million. In total, NIS 460 million was distributed.
Egged operates bus services in Israel, the Netherlands and Poland, travel and tourism services in Israel, operates and maintains the Tel Aviv light rail Red Line, and maintains buses through service centers for Egged and external customers. Egged also owns a portfolio of real estate assets.
Keystone's first quarter 2024 report shows that Egged's revenue rose 14% to NIS 1.38 billion and EBITDA rose 15% to $298 million. Net profit was NIS 89.7 million, up from NIS 80.5 million in the corresponding quarter of 2023.
Keystone CEO Navot Bar said, "Egged is proving to be an excellent investment for Keystone and its shareholders. We see Egged becoming more efficient from an operational and financial point of view, developing into new markets and achieving impressive growth in the various financial parameters. In our estimation, this is only the beginning of the increased value expected from the company. The sale option of Egged members is a business opportunity for us, and another realization opportunity for the founders. We are delighted that Hapoalim and Discount are joining the leading financial institutions that express confidence in Keystone and Egged and are happy to agree the financing framework for this transaction."
Keystone Fund was founded in 2019 by chairman Roni Biram, and Gil Deutsche and is managed by Navot Bar. The fund has so far invested in public transport, power plants, water desalination plants and more. Keystone's market cap is about NIs 1 billion, after the company's share price has fallen 37% since the start of 2022, before the purchase of Egged. In its results for the first quarter of 2024, Keystone reported equity of NIS 2 billion - double the company's market value - and net financial debt of NIS 740 million.
Published by Globes, Israel business news - en.globes.co.il - on June 23, 2024.
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