Delek Group to disburse dividend in Delek Real Estate shares

Delek Group's board of directors has approved the disbursement of a dividend in kind, of all or most of the shares in Delek Real Estate, to Delek shareholders.

If the disbursement is completed in the coming weeks, Delek Group controlling shareholder Yitzhak Tshuva, who currently owns 62% of Delek Group, will become the controlling shareholder of Delek Real Estate. Delek Group owns about 80% of Delek Real Estate. Hence Tshuva's holding will be 50.5%.

Bank Hapoalim, which currently owns 10% of Delek Real Estate, will retain its holding, and the remaining 39.5% will be owned by the public (including Delek Real Estate CEO Ilik Rozanski).

Delek Group CEO Asaf Bartfeld told analysts Wednesday that Delek Group sees no reason to grant Delek Real Estate financial support beyond the NIS 450 million in loans and guarantees that will be given to the company at the end of the dividend process.

Bartfeld noted that Delek Group is holding meetings with the tax authorities to solve the taxation issues raised by the dividend disbursement.

One of these issues concerns the deduction of income tax at source when a dividend is paid in kind, as this tax ranges from 0% to 20%, depending on the type of investors who own Delek Group shares.

Bartfeld explained that Delek Group has considered the tax expenses incurred by the transaction and will bear these expenses by retaining the portion of the Delek Real Estate shares equivalent in value to the tax expense. As of press time, the disbursement ratio for the shares was 1 to 9, such that shareholders will receive 9 Delek Real Estate shares for every Delek Group share they own.

Bartfeld did not mention the taxation rate, but industry sources estimate it at 5%-15%, meaning that Delek Group's tax expense subsequent to the share disbursement will be at least NIS 100 million.

The eligibility date for receiving Delek Real Estate shares and the date on which the shares are actually distributed will be soon after Delek Group obtains the necessary confirmations and after an arrangement is made concerning Delek Group and Delek Real Estate's covenants vis-a-vis third parties.

Bartfeld said he hopes the process will be completed by the end of this year, and that Delek Group officials had met with the main financing bank (probably Hapoalim) to sort out the financial issues that affect the banks. One issue that must be settled is the question of whether the payment of a dividend in kind constitutes a sale of the shares, and if so, how it is recorded for tax purposes.

Bartfeld and Delek Group CFO Barak Mashraki explained that Delek Group's balance sheet would look different after the dividend. Delek Group's consolidated gross financial debt - owed to the banks and bondholders, and Delek Real Estate's non-recourse loans, but excluding actuarial liabilities - should drop from NIS 33 billion to NIS 15 billion. That will substantially reduce Delek Group's financing costs.

Delek Real Estate's assets, as recorded on Delek Group's balance sheet, will drop by NIS 23 billion, and Delek Group's shareholder's equity (about NIS 8 billion as of June 30, 2008) will shrink to NIS 5 billion.