Ailing Cellcom Putting Elsztain’s Empire in Jeopardy

The cellular company may need a capital infusion and that could upset the IDB group’s delicate debt position

Real estate magnate Eduardo Elsztain, May 24, 2017.
Ofer Vaknin

When Eduardo Elsztain, the Argentinian Jewish real estate magnate, bought control of the IDB group from Nochi Dankner five years ago, he said he felt blessed by God for enabling him to undertake such a major investment in the Holy Land. In the last year, Elsztain has been splitting his time evenly between Tel Aviv and Buenos Aires, where he controls the real estate giant IRSA.

But as it turns out IDB hasn’t been much of a blessing, and on paper the 2.7 billion shekels ($750 million at current exchange rates) that he and his business partners put into the holding group has been lost. After showing signs of recovery as recently as the summer of 2017, IDB’s fortunes have turned for the worse.

In recent days, the stock market shows concern that the IDB group’s finances look similar to that of the Bezeq group’s, which are buckling under the weight of debt.

The proximate cause of the problem is Cellcom Israel, Israel’s biggest mobile provider, which on Monday reported a steep quarterly loss -- the result of investing in a fiber optics network and continuing revenue declines amid tougher competition.

Shares of Cellcom, which is 47%-owned by Elsztain through his Discount Investment Corporation, plummeted more than 16% this week, cutting its market cap to under 1.6 billion shekels.

Cellcom not only reported a loss for the quarter and for all of 2018, its free cash flow is down to almost nil and it is carrying 2.3 billion shekels in debt. Its problems aren’t going away anytime soon. “The Israeli telecommunications market is in a difficult state and without an urgent regulatory intervention to resolve the crisis a genuine damage to investments is expected,” CEO Nir Sztern said on Monday.

Tel Aviv Stock Exchange investors fear that Cellcom will have no choice but to raise hundreds of millions of shekels in new capital and that Discount will have to put up its share of the new capital or see its holding in one of three main companies in its portfolio shrink.

The market’s fears were reflected in Discount’s share price, which plunged 12.6% in the wake of the Cellcom report. Its Series Yud bonds fell 5% on Wednesday (the TASE was closed on Thursday for the Purim holiday) boosting its yield to 9.25%, a rate of interest that effectively precludes the company from recycling its debt.

The problems go up another tier in the Elsztain pyramid. In November, the company said it expected to have 671 million in cash on hand at the start of 2019 against 937 million in debt coming due over the course of 2019.

IDB hopes to raise cash from the sale of its Israir airline and is in talks to sell it for 225 million shekels. It’s also looking to divest its remaining 30% stake in Clal insurance.

But the market is obviously nervous. Although Elsztain took private IDB Development, the company at the apex of the group, 18 months ago, IDB still has publicly traded bonds. Its Series Tet bonds plunged 7% on Wednesday and now trade at a yield of 21.5%.

Discount’s situation looks better, but it still faces immense challenges. The company reported on Wednesday a 347 million shekel fourth-quarter loss because it had to write down 294 million of goodwill off the value of its Cellcom holding. For all of 2018, it wrote down 562 million on Cellcom and only posted a profit for the year by selling shares in its Shufersal supermarket subsidiary.

But its shares are trading at a market cap just over half its 2.3 billion shareholders’ equity. After paying a dividend and buying back some of its bonds, Discount has just 1.9 billion shekels on its books. Against that, it owes its bondholders more than 4 billion shekels, about a quarter of which is due this year and next.

Discount has enough cash to cover its repayments, but if it has to inject capital into Cellcom, the equation becomes more complicated. Among other things, its bondholders and minority shareholders are unlikely to approve Elsztain’s plan for Discount to buy IDB’s Clal stake. Elsztain has to complete the sale by the end of this year or find himself in violation of the Business Concentration Law.

Elsztain can take comfort that his proposal a year ago for IDB to buy control of Eurocom, the holding company once controlled by Shaul Elsztain that controls Bezeq was never realized.

The Bezeq group which, like IDB, is structured as a pyramid, is now contending with a similar problem of cascading debt problems. In the Bezeq group’s case, it was a decision by the Israel Securities Authority taken this week not to allow Bezeq itself to merge the finances of its Yes and Bezeq international units.

As a result, Bezeq will have to make a 1.5 billion shekel write down on Yes, its troubled satellite television unit and that in turn could trigger a call by the bondholders of its parent company, B Communications, to call in its debt. B Com announced this week it would stop bond payments and enter into talks about a debt accord with bondholders.

Bezeq shares fell 11.5% from Monday this week and BCom’s by close to 50%. Shares of Internet Gold, B Com’s parent company, plummeted 22.6% on Wednesday. Internet Gold is also seeking a debt bailout that will cost bondholders hundreds of millions of shekels.