Partner: Buyers face challenge, Hutchison can finally collect debt

Hutchison chairman Li Ka-shing  credit: Eyal Izhar

In bidding for Partner Communications, Avi Gabbay and Shlomo Rodav are hoping to succeed where Ilan Ben Dov and Haim Saban failed.

Two years after billionaire Haim Saban gave up on control of Partner Communications because of a debt of $300 million to Hong Kong-based Hutchison, Hutchison can now expect to receive the entire sum of the debt from the new consortium bidding to take over the company, led by Avi Gabbay and Shlomo Rodav together with The Phoenix Holdings insurance group.

If the deal is indeed signed and completed, the buyers will face a tough challenge: to succeed where two strong businesspeople, Saban and Ilan Ben Dov, who both controlled Partner in the past, failed. Saban and Ben Dov each lost a great deal of money on his investment in the company (and one of them dragged the financial institutions that financed most of his investment into losses as well).

By contrast, the "historical" controlling shareholder in Partner, Hutchison, not only made a dream exit on its investment in the past, but it is now receiving in full the finance that it provided to the buyers, if a few years late.

When Saban relinquished his investment in Partner, the reason was financial: the controlling stake that he held in the company (through S. B. Israel) was worth just NIS 737 million, while the debt to Hutchison taken as a seller's loan was, as mentioned, $300 million, equivalent to NIS 1.1 billion at the time, and was due for repayment shortly afterwards.

The fact that the Partner shares mortgaged to secure the loan were worth less than the loan amount led to Saban's decision to divest from Partner, and thus crystalize a loss of some NIS 500 million, because of the equity he had invested in the telecommunications company's shares.

Kahlon undermines Ben Dov's leveraged takeover

Hutchison was the controlling shareholder in Partner, and one of the company's founders. In 2009, shortly before the dramatic reform of the mobile telephony market introduced by Moshe Kahlon, then minister of communications, it sold control of Partner to Ben Dov's Scailex. Ben Dov's main business at the time was as the importer of Samsung mobile telephones.

The deal price reflected the high profitability enjoyed by the three veteran mobile telephony companies (Partner, Cellcom, and Pelephone). Scailex bought 51.3% of Partner for NIS 5.3 billion, at NIS 67 per share (more than triple the current share price). The deal was carried out almost without equity, with finance mainly from financial institutions through a bond issue by Scailex. Another component of the finance was a seller's loan to Scailex from Hutchison.

Ben Dov's leveraged takeover model, in which Scailex was meant to repay its debts from Partner's profits, did not endure. Kahlon's reforms decimated the mobile telephony companies' profits, drying up Scailex's sources of finance.

In August 2011, weak financials led to Partner's decision not to distribute a dividend. Dividends from Partner were Scailex's main source for repaying its bondholders. In the following years, Scailex's position deteriorated under the burden of the huge debt, leading in the end to the collapse of Ben Dov's pyramid.

In 2015, after Ben Dov's businesses had collapsed, a debt arrangement was signed that closed the miserable affair from the point of view of Scailex's creditors, who took a haircut of about half the debt owed to them, some NIS 1 billion.

Scailex, which had become insolvent, was transferred under the arrangement to Jacob Luxenburg, who held Scailex bonds through Lapidoth Capital, and who provided the company with guarantees to secure the bank credit that it needed.

Saban's complaints

As mentioned, when Scailex bought Partner in 2009, Hutchison provided a loan of $300 million. The loan bore 2% interest, and was secured on the shares in Partner. That loan was due to be repaid in 2014, but even before then Ben Dov was compelled to relinquish control of Partner.

In 2012, a deal was signed (it was completed in 2013) whereby Saban bought control of Partner from Ben Dov. Saban came along just after exiting a highly profitable investment in telecommunications company Bezeq, and when Ben Dov got into difficulties, he decided to go back for another round in the Israeli telecommunications market. Saban bought 30.7% of Partner for NIS 250 million (NIS 32 per share). He paid another NIS 83 million for 2% of Partner held by Bank Leumi, and later injected further sums in a share offering and in interest payments to Hutchison, as he had taken on himself the debt owed by Scailex to Hutchison as part of the purchase deal.

Repayment of the original loan was deferred from 2014 to January 2020. In late 2018, "Globes" reported that Saban had begun to talk to Hutchison about changing the loan terms to spread repayment over a longer period and to convert part of it to equity. In the background, competition in the mobile telephony market was becoming fiercer, and Partner's share price was weakening.

Because of the negotiations, the interest payment that Saban was supposed to make to Hutchison was deferred. A year later, in November 2019, Saban officially relinquished his holding, in a report of a default event (on the terms of the loan), following which a receiver was appointed for the controlling shareholding in Partner, which was mortgaged to secure the loan. In parting from his investment, Saban talked of "the difficulties, the significant failures, and the regulatory obstacles placed in the way."

Hutchison realized that it would not receive a permit to control Partner from the Ministry of Communications, which it would have required if it was to keep the stake in the company, and began to prepare to sell the shares.

Last week, it was reported that a consortium of investors headed by The Phoenix Holdings, Gabbay and Rodav had submitted an offer to buy the shares (27.1% of Partner) for $300 million. The receiver, Adv. Ehud Sol, stated that he supported the offer and would apply to the court to obtain approval.

The current value of the shares is NIS 927 million. The rise in the price of the shares, together with the decline in the shekel-dollar exchange rate in the period since Saban relinquished his holding, have led to the dollar value of the shares being just under $300 million.

Conglomerate worth over $25 billion

Hutchison held control of Partner Communications through Hutchison Telecom, part of the Hong Kong-based international conglomerate CK Hutchison Holdings. The conglomerate in its current format is the product of the merger in 2015 between Hutchison Whampoa and Cheung Kong, which was previously a shareholder in it. The group operates in many countries, mainly in infrastructures, energy, ports, telecommunications, and retailing. Over the years, Hutchison has made additional investments in Israel. The current market cap of the merged company on The Stock Exchange of Hong Kong is US$25.4 billion.

Hutchison's difficulty in obtaining a permit to control Partner, even though it had been a controlling shareholder in it in the past, actually arose from objections by the US, because of its being a company connected to China. In the past two years, Hutchison has had no influence in Partner and no representation on its board of directors.

Published by Globes, Israel business news - en.globes.co.il - on November 29, 2021.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2021.

Hutchison chairman Li Ka-shing  credit: Eyal Izhar
Hutchison chairman Li Ka-shing credit: Eyal Izhar
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