Dori Construction Group Reeling After Shock Second-quarter Loss

Parent company Gazit-Globe will inject cash into Dori as companies revive plan for merger.

Moti Milrod

Reeling from a surprise second-quarter loss that could reach as much as 350 million shekels ($102 million), U. Dori Construction said Monday it would quickly take steps to recover, including a capital infusion from its parent company, Gazit-Globe Israel. The Israel Securities Authority said it was looking into the matter.

The steps were announced shortly after shares in U. Dori Construction and its parent, U. Dori Group, were suspended from Tel Aviv Stock Exchange trading Monday, after they plunged Sunday on news of the loss.

Dori Construction dropped 45% on Sunday and a further 5% Monday, before trading was halted. When they resumed selling toward the end of the day, they jumped 8.6%, to a close of 1.49 shekels. Dori Group also turned around after a 23% drop on Sunday, to end up 1.9% at 1.03 shekels

The company attributed the loss to “a significant divergence in the estimated expected costs and revenues from its [construction] projects,” but added few other details.

Dori Construction lost 30 million shekels in the first quarter and posted a negative cash flow of 115 million shekels, leading to its CEO’s dismissal. After the surprise first-quarter loss, the company reexamined its financial reports and released the preliminary results on Sunday.

The company warned on Sunday that it may have to restate early financial reports, and might have trouble meeting debt obligations.

The massive loss was already raising questions in the market about the group’s corporate governance. “How could an error of that scale occur in a publicly traded company that is subject to supervision and controls?” asked one observer.

Dori Construction and Dori Group said in a TASE announcement Monday that they were preparing a plan to strengthen their cash flow and equity structure, which could include reviving plans for a merger between the two and early redemption of Dori Construction bonds. In addition, Gazit-Globe Israel – the real-estate investment company controlled by Dori Segel and Chaim Katzman that controls Dori Group – said it would inject 200 million shekels into Dori Group and convert a 125 million-shekel shareholders’ loan into equity.

The ISA has asked for a number of clarifications about plans, such as how Gazit-Globe’s cash infusion will reach Dori Construction through the intermediate company, Dori Group.

The merger plan comes just weeks after Dori Group made a general offer for Dori Construction shareholders to exchange their shares for those in Dori Group. The offer, which was priced 10% below the shares’ market price at the time, failed to win enough support from Dori Construction shareholders.

On Sunday, Ayalim Mutual Funds asked the trustee of Dori Construction bonds to call an urgent meeting to seek immediate redemption, citing the serious deterioration in the company’s business.

The huge losses will reduce the company’s equity – which was 207 million shekels at the end of the first quarter – to a level below the minimum set by its bond covenants, though it would need to remain below this level for three consecutive quarters to be considered in violation.

Dori Construction owes 80 million shekels to bondholders and another 34 million shekels to the banks. But it has only 11 million shekels in cash on its books and faces a 15 million shekel bond repayment next March. The bonds, which carry an A3 rating from Midroog, fell 7% on Sunday.

U. Dori, which develops luxury apartment towers (including the Yoo complex in Tel Aviv), office buildings and malls, was formed in 1998 and went public in 2010, at a market valuation of 231 million shekels. But in the next four years, its shares dropped 60%, leaving it with a market cap of just 87 million shekels.