Can the Israel Corporation be saved from itself?
Idan Ofer's holding company is still pouring money into the black hole of Better Place, but institutional investors have the power to stop it.
Can the Israel Corporation keep propping up Better Place with impunity, covering its deficits with repeated cash infusions? Some of the holding company's institutional shareholders would seem to have a say in the matter - but only if they speak up.
In August, when Better Place reported a $64 million loss in the second quarter, Israel Corporation's CEO Nir Gilad commented, "I too would like to know when Better Place will start turning a profit."
He thereby for the first time indicated dissatisfaction with the company's progress and the management style of its then-CEO, Shai Agassi, who was sent packing several weeks later.
Israel Corp., controlled by Idan Ofer, is already pouring substantial sums into Zim Integrated Shipping Services, its cash-burning subsidiary. That raised the question of whether the holding company, which has already invested $229 million in the vision
Ofer shares with Agassi, would continue to do so, or decide that Better Place is a bottomless pit.
The answer came last week when Israel Corp. announced it would put another $67 million into Better Place to cover its cash shortfall. The company noted that Ofer, who also owns a direct 8% stake in Better Place, will put up an additional $19 million (an equivalent sum in proportion to the size of his Better Place stake ) on the same terms.
Anyone who thought Gilad would translate his implied criticism into action and put his finger in the dike was in for a disappointment. Likewise anyone hoping that Israel Corp. would stem the flow of investment into the loss-ridden enterprise.
Ofer would seem to have a personal interest in his dealings with Better Place. But the fact that Israel Corp. and Ofer are investing under identical conditions exempts them from the rules governing interested party transactions and allows Israel Corp. to make do with approval from its audit committee and board.
The provision allowing the exemption, however, contains one exception that permits Israel Corp.'s institutional shareholders to intervene and demand a shareholders' assembly to discuss the future of their investment in the vision - some would say pipe dream - shared by Agassi and Ofer.
According to clause 1c of the regulations governing interested party transactions, the exemption is null and void if one or more shareholders owning 1% of the company's capital objects to invoking it within 14 days of the company's announcement. In that case, Israel Corp. would need to convene its shareholders to approve the decision by a majority vote that excludes anyone with a conflict of interests.
Several institutional investors could demand such a meeting on their own: Menora Mivtachim Pension, with 2.25% of Israel Corp.'s shares, Psagot Investment House with 1%, Clal provident funds (with 1.5%, Clal Insurance Enterprises Holdings with 1.6%, Phoenix Holdings with 1.1% or Migdal Insurance & Financial Holdings with 1.2%.
But personal ties may make this difficult. Zehavit Cohen, CEO of Psagot's parent, Apax Partners Israel, sits on Israel Corp.'s board. Dan Suesskind serves on the board of both Migdal and Israel Corp., and also sits together with Israel Corp. chairman Amir Elstein on the board of Teva Pharmaceutical Industries.
Time to take a firm stand
Nonetheless, it seems past time for the institutionals, as custodians of the public's savings, to take a firm stand on investing in a company that threatens to become a major loss center for Israel Corp. and stop hiding behind the convenient curtain offered by the exemption.
The company's audit committee and board determined that the additional investment is appropriate, reasonable, and serves Israel Corp.'s best interests. They justified the infusion as providing Better Place with the support needed to begin going commercial, arguing that the new management team is taking steps to deal with the challenges.
"The current round of investment, considering Better Place's risk profile, cannot affect the risk of the company's asset portfolio considering its size and composition," they concluded.
Put more bluntly, what the audit committee and board are essentially saying is: What's $67 million compared with the size and power of our cash cow, Israel Chemicals, whose lucrative potash dealings have generated $1.2 billion in operating profits over the past 12 months?
But the institutionals ought to recall the similar statements made when IDB bought Israir from Nochi Dankner and the other owners of Ganden Holdings. Another $67 million won't bankrupt Israel Corp., which has already invested $229 million in Better Place. But nobody can promise this infusion will be the final one.
Better Place isn't even close to meeting the performance targets it presented to institutional investors between April and August, when it tried raising 200 million euros via a bond offering and mezzanine financing. At that time, it anticipated a 23 million euro cash flow deficit for the entire year. But it ended up generating an 80 million euro deficit in the first half alone.
Well below forecast
The company also thought it would end the year with 4,000 customers; by the end of September, it had sold just 457 cars. The 11 million euros in revenues it forecast for the year remains a distant dream as well, with turnover in the first half coming to a mere 1.9 million euros.
Better Place's loss-generating capability is impressive enough that the managers of Psagot, Clal Insurance, Phoenix, Menora and Migdal ought to decide whether the investment in Better Place should continue, rather than placing this authority and responsibility in the hands of Israel Corporation's board.