Even after injecting more than 2 billion shekels ($520 million) into IDB Development Corporation over the last two years, the Argentinian property magnate Eduardo Elsztain has failed to extricate the holding company from its chronic cash crisis.
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Indeed, IDB Development, which sits at the apex of a sprawling conglomerate that includes Israel’s biggest mobile provider, supermarket chain and insurer, now faces two critical challenges.
One is a threat from holders of IDB’s Series Tet bonds, who are owed 1.1 billion shekels, to seek a liquidation order. The second comes from Dorit Salinger, the director of the treasury’s capital market, insurance and savings division, who has ordered IDB to sell off its 55% stake in Clal Insurance in blocks of 5% even though Clal’s share price values the company at a paltry 50% of its book value (see The Ticker on this page).
On the other hand, Discount Investment Corporation has brought some badly needed good news to Elsztain, who bought IDB from Nochi Dankner in 2014 in a debt bailout.
Shares of Discount, which controls much of the group’s businesses and is 76.5%-owned by IDB, have risen 45% over the last three months and now trade at a market valuation of 900 million shekels. Discount closed 1.3% higher yesterday, at 8.99 shekels.
All of Discount’s subsidiaries are profitable and in the first quarter showed improved profitability and business performance.
Discount’s holdings include stakes of about 45% each in Cellcom Israel, the country’s biggest mobile provider, and Super-Sol, the biggest food retailer. It also owns 40% of Adama, the world’s biggest maker of generic agrochemicals, and 76.5% of real-estate developer Property & Building, in addition to a host of smaller holdings.
The combined market value of all these holdings is 4.85 billion shekels, against 4.36 billion shekels Discount owes to bondholders and banks if the debt were to be repaid today. But Discount also had 600 million shekels in cash as of the end of last year, so that its net financial debt is 3.76 billion shekels. It’s leveraging it 77%.
After taking into account headquarters overhead for the group and accumulated interest payments, Discount’s net asset value comes out to about 1 billion shekels, or 11% more than its market cap.
Cellcom’s market value has grown to 3.2 billion shekels, with its share price up 40% in the last three months. The company has managed to stop the decline in monthly charges and the conventional wisdom now is that rates will begin climbing even after Cellcom’s proposed merger with Golan Telecom was quashed by regulators.
Super-Sol, meanwhile, has benefited from the near-collapse of its rival Mega (see story on this page) and now trades at a market cap of 2.7 billion shekels. Unlike Cellcom, however, Super-Sol will face a tougher competitor in Yenot Bitan and its valuation may not grow as a result.
Moreover, Discount has warrants coming due over the next two years that could bring it another 375 million shekels, if they are exercised.
Right now all the warrants are in the money, which makes it likely that will happen sooner rather than later: The Series 4 can be converted to shares at 7.18 shekels each up to next December. The Series 5, also due in December, can be exercised at 7.82 and the Series 6, which can be exercised through December 2018 at 8.53 shekels.
The catch is whether IDB continues as a “going concern” — in other words, its auditors don’t designate it as being at risk of insolvency. With its 76.5% stake in Discount, it will have to put up 221 million shekels for Discount to realize all that cash.
Despite Discount’s improving fundamentals, its bonds still yield at a relatively steep 9%, which would make it hard for the company to recycle its debt at a reasonable cost. Its bonds are rated by Standard & Poor’s Maalot at BBB-minus.
The valuation assumes that Discount’s Adama stake is worth zero because the value of Discount’s stake has been pledged as collateral against a $1.2-billion loan it took in 2011, when China National Chemical Corporation bought 60% of Adama from the IDB group.
Discount has been paying interest of $60 million annually on the loan, which has come out of annual $100 million dividends Adama has been paying. However, the principal is due in October 2018. Meantime ChemChina has been in negotiations about merging Adama into the Chinese Hubei Sanonda and in the context Discount has been seeking to extend the deadline for repaying principal.
Adama, which is run by Israeli Chen Lichtenstein, turned in strong first-quarter earnings last week. Its operating profit grew 3% from a year ago to $129 million and net profit by 7% to $101 million. But using the valuation model common in the industry, that would still put Adama’s worth at no more than $3 billion, meaning Discount’s debt is worth no more than its holding.