$250m KKR loan could spur IDB-Koor merger
A boon for Dankner if he gets it, but it remains unclear whether complicated deal can be pulled off.
A $250 million loan from New York-based private equity firm KKR could be IDB Holding's linchpin in plans to merge with subsidiary Koor Industries. But it's still far from certain the complex deal will take place.
A KKR loan worth between $200 million and $250 million will carry steep annual interest with a weighted average of around 15% or higher. But for Nochi Dankner, the IDB group's chairman and controlling shareholder, the loan's cost might seem reasonable, given that the company's bonds are trading at yields up to 200%.
Dankner would like IDB Holding to do a complete link-up with Koor, which is flush with cash. Koor is controlled by the IDB group through Discount Investment Corporation and IDB Development Corporation, with stakes of about 70% and 13% respectively. The public holds about 17%.
Koor's stock surged 27% after talks with KKR came to light about two weeks ago; that gives the company a market value of about NIS 2.4 billion.
Formerly known as Kohlberg Kravis Roberts & Company, KKR is managed by Henry Kravis. It's famous for hostile takeovers like the acquisition of RJR Nabisco nearly 24 years ago. That saga was chronicled in the 1989 book "Barbarians at the Gate."
Convincing Koor shareholders
But Koor shareholders are unlikely to be content with a takeover offer at market value. Considering the company's high liquidity and reasonable leverage, they will probably insist on a hefty premium.
Moreover, Koor has an option to sell its stake in Makhteshim Agan linked to its deal with China National Chemical Corporation, the company that bought 60% of Makhteshim a year ago. The option is viewed as IDB's best hope for a capital gain.
Assuming a 20% premium on Koor shares would entice minority shareholders, IDB Holding would need to spend NIS 3 billion on the takeover. But Koor also has bonds with a fair value of NIS 1.6 billion. To complete the acquisition and win bondholders' approval, the bonds would need to be redeemed, raising the cost to IDB Holding to NIS 4.6 billion - or more if shareholders demand a higher premium.
If the merger happens, IDB is counting on Koor's estimated cash of NIS 2.3 billion to pay down part of the sum. It also plans to cash in on Koor's 2.3% stake in Credit Suisse, which would net somewhere between NIS 1 billion and NIS 1.5 billion after taking into account loans from Citigroup and Morgan Stanley. But caution is needed here to avoid flooding the market with Credit Suisse shares and sending the stock lower.
If it can draw NIS 3.8 billion from Koor and its Credit Suisse stake, IDB Holding would still need NIS 800 million - which the KKR loan could provide - with perhaps a $50 million cushion to help it pay down debt.
If the collateral given KKR by IDB includes Koor's $960 million option to retain its 40% stake in Makhteshim, KKR might end up hoping IDB defaults. If Makhteshim could be floated at a $4 billion company value, the immediate profit would be enormous.
Dankner's main hurdle in closing a deal with KKR is getting IDB Development bondholders, who are owed NIS 4.4 billion, to agree. But Makhteshim is one of IDB's most valuable assets, so it might not be easy to bring them aboard.
And none of this will go far in solving IDB Holding's debt problems. The company owes NIS 1.7 billion in bonds and NIS 300 million to banks, with only NIS 200 million in its coffers, which will last until June 2013. Neither will it solve the problems of Ganden Holdings, the parent company of IDB Holding, which owes NIS 500 million to Bank Leumi and NIS 100 million to Bank Mizrahi-Tefahot.
Restructuring remains an issue
It still isn't clear how IDB Holding can meet its liabilities without restructuring its debt. Dankner, meanwhile, hasn't given up hope that Argentine tycoon Eduardo Elsztain will put up NIS 300 million for a 21% stake in privately-held Ganden, funds that could be used to try reducing IDB Holding's debt load.
Dankner will need to overcome another challenging hurdle next month if a deal isn't closed with either KKR or Elsztain by then: finding a source for IDB Holding to cover a NIS 64 million interest payment on its series B4 bonds. Taking money out of Ganden would require approval from Leumi and Mizrahi, which have already made provisions against most of Ganden's debts.
If Dankner overcomes this hurdle he'll have another six months to find an overall solution. In the past he has always managed to produce a surprise to save him. This time, though, the numbers might be too high - even for him - though he denies this and insists he'll pay back every penny.