IDB May Be Forced to Undertake Massive Asset Sales Affecting Major Israeli Companies

Debt woes grow for Elsztain empire after Cellcom’s fourth-quarter loss

File photo: Eduardo Elsztain speaks at an IDB conference at the Tel Aviv Stock Exchange, March 23, 2017.
Shai Shachar

Eduardo Elsztain’s IDB group suffered Sunday another day of big losses on the Tel Aviv Stock Exchange raising expectations that the Argentinian tycoon will have to divest some part of the group to raise cash.

An asset sale could see some of Israel’s biggest and best known companies on the block, including Shufersal, the country’s biggest supermarket chain, real estate developer Property & Building Limited and Clal insurance. Negotiations to sell Israir, one of Israel’s three airlines, are already underway.

>> Ailing Cellcom putting Elsztain’s empire in jeopardy

“Elsztain has to act quickly. IDB Development and Discount Investment Corporation don’t have time – they have to sell significant assets to survive. Otherwise, IDB Development will end up in a big debt bailout,” said one manager at a leading institutional investor, who asked not to be named.

“In another two or three years, IDB will have shrunk and no longer have the big empire that controls such big parts of the economy,” the manager warned.

The stock market has turned sour on IDB since last week when its Cellcom Israel unit, the country’s biggest mobile provider, turned in a fourth-quarter loss and warned that its outlook is bleak. That raised fears that Discount Investment Corporation will soon have to inject significant capital into the company, undermiing the group’s ability to service its debt.

Cellcom’s troubles mark a sea change for Elsztain, who acquired control of the IDB group and its heavy debt obligations five years ago from the disgraced tycoon Nochi Dankner. As recently as the summer of 2017, IDB looked to be on the road to recover and had a net asset value of 1.1 billion shekels ($300 million at current exchange rates).

Sources close to Elsztain said on Sunday that he had patience and a strong stomach for risk, since his main business, the ISRA property development empire in Argentina, has had to cope with the country’s huge and recurrent economic crises.

IDB Development, which is closely held by Elsztain and partners, saw its Series Tet bonds plunge 3.9% on Sunday after the TASE got back from a long Purim holiday weekend. The bonds now carry a junk yield of 23% and reflect market expectations that bondholders could be in for a 43% haircut.

Shares of Discount dropped 2.9% and its Series Yud bonds tumbled 2.35%, leaving them with a yield of 9.6%, a rate much too high for the company to recycle its debt when they come due.

Discount had 1.8 billion shekels in cash as of the end of 2018, enough to cover two years of debt servicing. But the 40% drop in Cellcom’s market cap will hurt Discount’s equity position at the same time it will be forced to inject capital into the company.

Market sources said Discount could sell its 26% stake in Shufersal or its 67.4% holding in Property & Building, which together could raise it as much as 1.5 billion shekels. But that wouldn’t solve the problem of Discount’s parent company, IDB Development, because Discount bondholders would likely reject any proposal to use the money to pay dividends to IDB.

IDB had just 671 million shekels in cash at the start of the year versus debt repayments of 937 million coming due in 2019 alone. Some of the burden may be alleviated by selling its Israir unit for up to 250 million shekels, as it is negotiating to do, but IDB faces more debt repayments in 2020 and 2021.

An cash-raising option is for IDB to divest Clal insurance, which it has to do in any case by the end of the year under the Business Construction Law.

Elsztain has failed to date to find a buyer for his 25% stake in Clal, but the alternative of selling it to the public on the TASE would fetch very little: Clal trades at a market cap of just 2.75 billion shekels, or just 0.5 its book value.

Elsztain has explored the option of IDB’s selling Clal to Discount, which would buy him time to fetch a better price for the insurer. But given Discount’s deteriorating financial state, it is unlikely that bondholders or minority shareholders would ever agree to such a deal.

That leaves the option of selling Discount instead of Clal or to try and raise capital from his investors in the United States and Latin America.