Motti Zisser
Motti Zisser. Photo by Dan Keinan
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Elbit Imaging's share price fell by 95% over the past five years, and its bonds are trading at yields of anywhere between 30% and 73%.

Those double-digit yields reflect investor fears that the group, which is controlled by Motti Zisser, will not succeed in repaying all of its NIS 6 billion in financial obligations.

But some relief may be on the way, as the company may well receive a dividend from its 93%-owned subsidiary Elbit Medical. That is because the latest financing round for Elbit Medical's InSightec unit gives it an option to sell part of its shares in InSightec to an investor who will inject new cash into the company.

The company made the option known in its Thursday announcement regarding the completing of $31.4 million in fundraising from the current shareholders, led by GE Healthcare, who will invest $27.5 million. Of this sum, $22.5 million is in cash, and $5 million will come from converting a loan it provided to InSightec last June into equity. The TMA fund, founded by the former GE personnel who developed the InSightec technology, will invest the other $3.9 million.

As part of this deal, Elbit Medical and GE promised to convert all the convertible loans into InSightec shares, totaling $29 million. As a result, Elbit Medical's holdings in InSightec will drop from 64.3% (53% on a fully diluted basis ) to 48% (41% fully diluted ).

New accounting

Elbit Medical and GE signed a new shareholders agreement which specified that the InSightec board will include six members, of whom only two will be chosen by Elbit Medical. Accordingly, Elbit Medical will no longer consolidate InSightec's financial reports, but will present them according to the equity method.

This loss of control means that in the future Elbit will value its holding in InSightec according to the fair value - in other words, in line with how much the company is appraised for during the GE-TMA fundraising round. How big that will be is anyone's guess, including Elbit Medical's, but is likely to be quite significant.

Elbit Medical currently values InSightec at a negative $43.6 million, based on the fact that it controls the company and guarantees its losses. Assuming that InSightec is revalued at the level of its last fundraising round, Elbit Medical's capital gain will reach $95 million, or NIS 365 million. Of course, this is an accounting gain that does not generate any new funds for Elbit Medical, so this will not improve its liquidity.

Elbit Medical looks to be going the route of Nochi Dankner's IDB group, which in recent years has exploited a particular IFRS accounting standard for reporting significant capital gains and distributing dividends without any liquid funds.

According to this accounting standard, when one company loses control of another because its holdings drop to below 50% and its influence on the board is small, accountants must treat it as if the shares were sold based on their fair value at the time. Next, accountants book a notional purchase of the shares, even though in actuality they never changed hands.

The process entails a revaluation of the shares and a capital gain on the difference between the fair market value of the shares and the value at which they had been registered on the controlling company's balance sheet.

Two years ago, Discount Investment Corporation posted a capital gain of NIS 1.29 billion using that method, after it raised its stake in Super-Sol to just above 50.3% following the purchase of 8.3% of the food retailer shares. The same year, Clal Biotechnology Industries registered a capital gain of NIS 435 million after Teva Pharmaceuticals invested in Clal's Medi Vend subsidiary, which reduced its holdings to 45%.

The accounting capital gain that Elbit Medical will register will cover its loss of $42 million, but will not allow it to distribute dividends, since it had only $569,000 in cash on its books at the end of the second quarter. Elbit Medical is therefore likely to sell part of its InSightec stake.

90-day option

In that context, the company holds a 90-day option that can be exercised by it or a third party approved by GE Healthcare, to acquire all the shares that GE acquired in the transaction, for the same amount that GE paid.

InSightec is expected to sell part of its shares in the company to a multinational that will then hold a stake of between 25% and 30%. InSightec will then transfer the proceeds in full to Elbit Imaging, which desperately needs cash to repay bondholders and its banks.

InSightec was founded in 1999, based on technology that was developed in GE Healthcare. Its ExAblate 4000 system is used to perform non-invasive surgery via an ultrasound beam guided by a MRI device techniques. ExAblate 4000 is approved in the United States for treating uterine fibroids, and in Europe for relieving pain caused by bone metastases. The company is developing new applications - for example, for treating prostate cancer, liver cancer and breast cancer.

GE's interest in the company apparently stems, among other reasons, from InSightec's experimental treatments using the technology to treat central nervous system issues. InSightec has lost $107 million since 2008 on turnover of $58 million.