Oded Sarig
Oded Sarig Photo by Michal Fattal
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The sale of Partner Communications' parent company, Scailex Corporation, to Hutchison Whampoa has hit a shoal. The Finance Ministry and Psagot Investment House are mounting fierce broadside attacks against the deal, claiming it will fleece bondholders.

On Wednesday Oded Sarig, the treasury's capital markets, savings and insurance commissioner, sent a letter to institutionals holding Scailex bonds, ostensibly asking them to address the deal, which he said posed a "potential violation of fund members' rights," but in fact signaling that they should reject it. This is the first time the commissioner has ever intervened in a specific transaction.

"In view the possible damage to members' rights, we would like to know how you will protect the funds entrusted to your management," Sarig wrote.

Suny Electronics, controlled by Ilan Ben-Dov, has agreed to sell its controlling stake in Scailex to Hutchison for $125 million and to pay $100 million to buy back Scailex's Samsung cell-phone importing business. One of Hutchison's conditions is an imposed settlement for the roughly NIS 2 billion in outstanding bonds issued by Scailex, for which it proposes paing 15% to 30% under face value.

Remarkably, this would mean a "haircut" for bondholders that not only doesn't cost the owner anything or require him to pay in, but even sees him coming out ahead: Ben-Dov may be losing Partner but will be left with the income-generating Samsung import business while the bondholding public pays the price. This is probably why Sarig decided to set a precedent and step into the picture.

Meanwhile, Psagot also went into action, with freshly minted CEO Hagai Badash leading the charge after just one week on the job. In a letter to the bond trustees - Clal Finance, Hermetic, Strauss & Lazar, and Reznick Paz Nevo trust services - Psagot insisted on urgently convening bondholder meetings to appoint representatives for a showdown with Scailex.

Psagot objects to haircut

It is reported that Scailex shareholders are expected to receive payment for part of their shares while bondholders are being required to forfeit part of the debt they hold," said Psagot's letter. "This formula contradicts Psagot's principles on debt settlements and it therefore appears that Psagot, with the interest of its customers at heart, cannot agree to the current format."

Psagot, which holds about NIS 200 million in Scailex bonds for its clients through its mutual fund company headed by Yaron Dayagi, argued that it is unacceptable that the shareholder, Ben-Dov in this case, is being compensated while creditors are given a haircut. This, it said, contravenes all economic and financial logic according to which creditors always take precedence over shareholders when problems arise.

Sarig listed three questions that need to be addressed, clearly hinting at the three acute drawbacks he finds in the deal.

"Can it be said that compensation to the controlling owner for company shares doesn't come at the expense of compensation to bondholders who will have to accept a purchase offer at a substantially lower price than face value?" was the first issue Sarig laid on the table. This relates to Hutchison paying Suny, owned by Ben-Dov, $125 million for its Scailex shares when Hutchison could have used the same money to up its offer to bondholders.

The second question Sarig put to the institutionals is, "Could the partial planned purchase offer cause preferential treatment for other creditors over the debt you own?" The commissioner referred here to Hutchison's decision to forcibly buy back only some Scailex bond series, possibly giving rise to discrimination between creditors.

The third point was, "Does the Samsung activity transfer price reflect its market value?" Sarig referred here to the second part of the deal between Hutchison and Ben-Dov whereby the latter, through Suny, will use part of the money paid by Hutchison to buy back the Samsung cell-phone import activity from Scailex.

Sarig asked the institutionals for their responses to these three points of contention by Sunday, "including an updated analysis of the deal's effect on the debts you are holding," he wrote.

The commissioner of capital markets, savings and insurance doesn't actually have the authority to interfere with the judgment of institutionals in specific transactions. He can only intervene where an institutional is being run in a way that endangers its members' funds and, even then, only in the most exceptional circumstances. The institutionals could, in fact, ignore his request for clarifications - or refuse to "get the point" - and approve the Scailex deal.

Even so, it can be assumed that the institutionals would have a hard time doing so publicly, especially considering that this is the first time the commissioner has ever decided to meddle in a specific deal, proving how strongly he disapproves. Furthermore, refusing to follow his instructions could expose them to potential lawsuits by fund members. So it is likely the institutionals will "get the point" and reject the Scailex deal in its current format.