Eduardo Elsztain, the Argentine tycoon who stormed onto the Israeli business scene eight years ago by acquiring IDB, effectively lost control of the giant holding group Thursday, after a Tel Aviv court declared it insolvent and appointed a trustee to oversee the liquidation of IDB Development Corp.
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Tel Aviv District Court Judge Hagai Brenner rejected Thursday a last-ditch attempt by Elsztain to buy time by offering a deposit of 35 million shekels ($10.2 million) in exchange for a three-month grace period to negotiate a debt settlement with IDB Development bondholders.
Elsztain has long struggled to bring IDB’s debts under control. Over the years he injected 3 billion shekels into the group and sold off assets to raise cash. But IDB owes bondholders 2.05 billion shekels. Elsztain’s troubles in Israel coincide with severe economic disruptions in Argentina, where he controls IRSA, the country’s largest real estate company.
Brenner appointed attorney Ophir Naor as trustee in the name of IDB Development’s Series Tet bondholders and authorized him to dismiss IDB’s board. Attorneys Alon Binyamini and Ra’anan Kalir were named temporary receivers for assets pledged as collateral to Yud-Dalet bondholders, namely a 70% stake in IDB’s sister company Discount Investment Corp.
Ady Fighel and David Peretz were appointed receivers for Tet-Vav bondholders, to which were IDB Development pledged as collateral a 5% stake in Clal Insurance.
While Brenner acknowledged that Elsztain’s claims that liquidation would reduce the value of remaining assets and be unnecessarily costly may be valid, the lawyer said the final decision lay with the creditors.
“The rule is that the court does not interfere with the creditors’ opinion regarding the economic viability of any arrangement offered them, nor will it rely its own opinion in place of theirs, even if in the court’s opinion the creditors erred in their judgment,” Brenner wrote.
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Brenner was also sympathetic to the billions Elsztain had put into IDB group without reaping any benefit. “I am sorry about that, but this is the result required by law, while we are dealing with an insolvent company and in the absence of any apparent chance of obtaining a creditors’ settlement that will prevent liquidation and enforcement of the liens,” he wrote.
Elsztain first became involved in IDB in September 2012, reportedly on the advice of Rabbi Yoshiyahu Pinto, investing 100 million shekels in Ganden, the investment vehicle then controlled by Israeli tycoon Nochi Dankner.
Elsztain and Dankner began as partners, but eventually Elsztain acquired control of IDB Development together with Moti Ben-Moshe, an Israeli-German entrepreneur, in a deal that valued it as much as 1.3 billion shekels. Elsztain and Ben-Moshe parted ways five years ago, leaving the former in sole control of the group.
Elsztain did his best to rescue the group, whose debt was much bigger than it is today. In addition to injecting 3 billion shekels into the group, mostly from capital raised in Argentina, he also declined to take dividends or draw a salary. The value of Discount Investment’s Shufersal subsidiary grew to 6 billion shekels under his control, which enabled him to earn a significant profit by divesting it. He raised another 900 million shekels selling the agrochemicals maker Makhteshim Agan (today Adama) to China National Chemical Corporation (ChemChina).
But in terms of managing the group, Elsztain made many mistakes. Aside from spending heavily on executive salaries, lawyers and media advisers, he entered into a needless dispute with Capital Markets Commissioner Dorit Salinger over selling the group’s Clal Insurance business after he was denied a license to control the insurer.
Instead of selling his 60% in Clal Insurance in a single bloc, Elsztain opted to divest tranches on the Tel Aviv Stock Exchange, leaving IDB Development with a giant 1.5 billion shekel loss.
IDB also ran up more than 1 billion shekels in losses from Cellcom Israel, Israel’s biggest wireless provider, which began contending with a major shake-up of the mobile market that led to more competition and lower prices around the time Elsztain gained control of IDB.
He missed the opportunity to take advantage of rising real estate rising prices, instead focusing the group’s Property & Building unit on investments in Las Vegas and the land on which New York’s Lipstick Building sits. Even his final act as IDB boss, a 100 million shekel investment in the Norstar unit of Gazit Globe, has generated a loss on paper of 30 million shekels for Property & Building.
IDB Development’s assets today include 100% of the company that controls the Israir airline, 26% of a company that owns an office and shopping complex in Las Vegas and 19% of Modiin Energy. Under current conditions, they will probably fetch not more than 250 million shekels. IDB also holds as a first lien 12% of Discount Investment with a market value of about 82 million shekels.
However, Series Tet bondholders – whose debt is not collateralized, say that a well-run divestment process could raise cash in excess of the 889 million shekels owed to Yud-Dalet bondholders, whose bonds are secured. The excess would go to cover Series Tet debt.
The key to that will be the timely sale of Discount Investment, where a 70.2% stake has been pledged as collateral to Series Yud-Dalet bondholders. After the sale of Shuferal, Discount controls four principal companies: 74% of Property & Building, 46.1% of Cellcom, 43.7% of property company Mehadrin and 61% of holding company Elron. Discount has debt of 3.25 billion shekels.
Discount trades on the TASE at close to 678 million shekels, meaning the value of the pledged shares is 475.5 million, far short of what Yud-Dalet bondholders are owed. But that gap could be closed, among other ways, by finding one or more buyers for Discount’s underlying assets, which are worth 600 million shekels more than its market cap.
Even if there are buyers for Discount, the receivers face a sensitive problem, namely that Elsztain remains the company’s chairman, and two of his siblings and two of his allies are directors. Elsztain associates control the boards of Discount subsidiaries as well.
Although the Business Concentration Law will deter many potential buyers from considering a bid for Discount, there have already been some preliminary expressions of interest from investment funds and private investors with deep pockets.