Analysis

Investors Growing Anxious About Elsztain’s IDB Group

Its debt woes are severe, confidence in his leadership has evaporated, and institutions want him to inject capital

Eduardo Elsztain at a conference at Tel Aviv University, May 18, 2019.
Ofer Vaknin

People close to Eduardo Elsztain, the Argentinian real estate tycoon who controls Israel’s IDB holding group, say he is radiating his usual confidence these days.

Elsztain recently made Israel his main place of residence and is apparently becoming more involved in day-to-day management of financially troubled IDB. He tells skeptics that in his 30 years managing a real estate empire in Argentina he has coped with far worse crises than he faces with IDB today.

That bullishness, however, is no longer shared by IDB’s creditors and minority shareholders.

Institutional investors, who hold billions of shekels in bonds issued by the group, have been signaling they want him to inject several hundred millions of shekels into IDB Development Limited, the group’s flagship company. Without that, they are threatening to wrest control of it and its sister company Discount Investment Corporation.

IDB Development has a negative net asset value of 500 million shekels ($139 million), meaning its debt exceeds its assets, while its Tel Stock Exchange-traded bonds are traded at junk yields. In the case of its series Tet bonds, which account for about half of IDB Development’s 3 billion shekels in debt, yields jumped to more than 30% on Tuesday after prices for the bond fell 3.7%.

One source close to IDB management, who spoke with TheMarker on condition of anonymity, admitted he had no idea whether Elsztain would provide the capital creditors want. To date, he has put 2.7 billion shekels into the group, but the source of the capital is not known.

“He has never revealed what he has or doesn’t have,” the source said. Vis-a-vis the group’s financial situation, the source said: “Today there are real holes that we don’t know how to fill. The institutions’ claims aren’t fictitious, they’re legitimate. Management has made it clear to Elsztain that he has two options – to work with the institutional investors, since he has failed to manage the company alone, or to continue to inject a lot of money.”

Critics say that when Elsztain took control of IDB group more than five years ago he hadn’t carefully examined its businesses nor articulated a strategy for extracting it from the mountain of debt it accumulated under its previous controlling shareholder, Nochi Dankner.

An Orthodox Jew who controls Inversiones y Representaciones, or IRSA, Argentina’s largest real estate company, Elsztain first appeared on the Israeli business scene as Dankner’s partner. He invested 100 million shekels in 2012 in the latter’s investment vehicle Ganden as Dannker was struggling with IDB’s debts. Two years later, Elsztain acquired control of the IDB group together with the Israeli-German entrepreneur Moti Ben-Moshe, but not long afterwards the two had a falling out and Ben-Moshe exited the partnership taking a 530 million shekel loss in the process.

That left Elsztain in control of a business empire whose holdings include many of Israel’s biggest and best-known companies – Cellcom Israel, the country’s largest cellular provider; Shufersal, its biggest supermarket chain; and Clal Insurance, one of its biggest insurers and asset managers.

But even then IDB was facing serious challenges, mainly due to its debt but also to the problematic performance of many of its key companies. Elsztain reportedly made his decision on buying IDB based on a promise by Rabbi Yoshiyahu Yosef Pinto that any investor in Israel would earn a return of two or three times his money.

That has certainly not been the case with the IDB group. Among its biggest holdings, Cellcom’s market cap has plunged 73% in the five years since Elstzain gained control. Elon Electronic Industries has declined 72% in value, Discount Investments by 63% and Clal Insurance by 11%. IDB’s real estate holdings have performed better, with Bayside’s value rising 11% and Property & Building’s by 55%, but they have underperformed relative to other Israel property companies.

IDB’s star performer, Shufersal, which has seen its market cap rise 103% to 6 billion shekels, making it the group’s most valuable holding, has benefited primarily due to the collapse of its former No. 2 rival, Mega, rather than to excellent management.

Critics say that Elsztain has failed to undertake the obvious strategy of selling assets to help deleverage the group. He was under orders from Israel’s insurance regulator to divest Clal Insurance (due to IDB’s precarious finances), but instead of acting quickly he fought the decision while Clal’s market capitalization dropped, thereby reducing the proceeds he got from the gradual forced sale of his stake. Two years ago, he passed up an opportunity to sell a 30% stake of Discount, which then had a 2.5 billion shekel market cap and would have yielded him a capital gain of 750 million shekels that would have gone a long way to reducing IDB’s debt.

He has sought to sell IDB’s airline unit, Israir, but the offers he’s received to date haven’t exceeded $55 million and no deal has been reached. His one successful divestment was a sale of part of the group’s holding in Shufersol, which yielded a capital gain of 1.3 billion shekels, but he has held on to the group’s remaining 26%.

The latest blow to IDB is the departure of two of IDB Development’s top executives this month – CEO Sholem Lapidot and CFO Gil Kotler – the first regarded as Elsztain’s right-hand man and the second the executive who was keeping the group financially stable.

The concerns of institutional investors over the future of the group have surfaced again this month as Discount Investments tries to delist Property & Building from the TASE so that the group is in compliance with the business concentration law. The law sets a December 2019 deadline for pyramid-structured holding groups like IDB to limit the number of tiers of publicly traded companies it has.

Minority shareholders responded indifferently to the initial offer, forcing Discount to raise its offer price twice to 390 shekels a share. More than 10 days later, Property & Building's TASE share price hasn’t come close to matching the Discount offer, signaling that investors doubt it will succeed.

On Tuesday, Property & Building's share price dropped 7.6% to 338.40 shekels. The credit rating agency Maalot-S&P put Property & Building on its CreditWatch list, citing concerns about the offer. In any case, institutional investors say they would rather the offer fail because they fear that once Property & Building is delisted they will have less leverage on Elsztain vis-a-vis IDB group’s debt.