Delek Group, the holding company controlled by billionaire Yitzhak Tshuva, is in talks to sell its U.S. insurance unit to a group of American investors, Republic Group, for some $220 million, TheMarker has learned.
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The sale come as Tshuva, who owns a stake in Israel’s giant Leviathan natural gas field, divests his holding in financial services. The two sides are reportedly close to an agreement, which values Republic at closer to its shareholders’ equity at the end of last year.
A spokesman for Delek declined to comment on any talks.
Dallas-based Republic has personal property, fire, automobile and commercial insurance sold through independent agents primarily in Texas, Oklahoma, Louisiana, Mississippi, New Mexico and Arkansas. The company has had a mixed record, earning $28 million in profits over 2012 and 2013, but losing $109 million in 2011.
The sale will require regulatory approvals in the United States as well as the completion of a due diligence process, a process that will take several more months, sources told TheMarker.
Delek will not post a capital gain on the sale but because it will be repaying a loan to the U.S. unit of Bank Leumi taken when it bought the insurer, Delek won’t be liable for tax either. As a result, it will enjoy the full cash flow generated by the sale, which will help Delek repay debt to banks and bondholders.
Delek took out dividends from Republic over the eight years it controlled the company, but it also put tens of millions of dollars of capital into it, so that the net return will be nil. Delek had earlier tried to bring in a joint venture partner to the company, but failed to reach an agreement.
Delek shares, which have a market capitalization of close to 17 billion shekels ($4.9 billion) on the Tel Aviv Stock Exchange, rose 1.3% on Wednesday to 1,441 shekels ahead of a meeting on Thursday with equity analysts.
The company is expected to update them on developments with Woodside Petroleum, the Australia energy company that has agreed to take a 25% stake in Leviathan.
Delek will also be reporting on efforts by its Delek Drilling and Avner units, the two companies that hold the conglomerate’s Leviathan stake, to raise a giant $1.5 billion in debt from domestic and overseas investors, which are expected to be completed by the end of this month.
Apart from divesting Republic, closer to home Delek is seeking to sell its 53% stake in Phoenix insurance. Tshuva has six years to divest the holding under the Business Concentration law passed by the Knesset at the end of last year, which places severe restrictions on companies holding both financial and non-financial businesses.
Despite the fact that Phoenix finished 2013 with record earnings of 744 million shekels and Delek is seeking to sell its shares at roughly the insurer’s 3-billion-shekel market valuation, it has failed to identify a buyer. The U.S. bank Wells Fargo is advising Delek on the sale.
As a result, Delek may have to sell its stake on the stock market in blocks of 5%, the same way that the Bronfman-Schron group has been divesting its stake in Israel Discount Bank.
Delek acquired Republic from a private equity fund in 2006, at the peak of a stock market rally. It paid $250 million in cash and assumed debt of $50 million that Republic was carrying. Republic has been in business for about a century.
Shortly after the acquisitions, Delek delisted Republic, partly to sell a stake to a partner at a higher valuation that the stock market was awarding it at the time.
Despite growing premium revenues, Republic never succeeded in translating those into high profits. Although it earned $19 million in 2013, over the eight years Delek controlled Republic its combined loss was $144 million, which Dleek executives attributed to payments the insurer made after major hurricanes in Texas and Louisana during those years.