Markstone in Race to Keep Magnolia, Jewel in Its Increasingly Lusterless Crown

If the private equity fund fails to repay a 50 million-shekel loan to Fortissimo, it will lose control of the Magnolia jewelry store.

Daniel Tchetchik

Just days after reaching an understanding to sell the Steimatzky bookstore chain at a loss of over 200 million shekels ($57.6 million), Markstone Capital Group now risks losing control of the jewelry store chain Magnolia, one of its few remaining profitable assets.

With the fund suffering severe liquidity problems, several months ago Markstone took out a mezzanine loan of 50 million shekels from another Israeli private equity fund, Fortissimo Capital. Failure to repay the loan quickly could leave the jeweler in Fortissimo’s hands.

While Markstone arranged the loan, the loan itself was taken out by Magnolia as a substitute source of liquidity in place of Magnolia’s repaying shareholders’ loans to Markstone. The aim is to relieve some of the fund’s liquidity problems. In addition, Magnolia also granted a 10 million-shekel loan to the troubled Steimatzky chain to help keep it afloat. This loan will now be transferred to Markstone itself.

Since Fortissimo does not usually grant loans like the kind it gave Magnolia, it took care in return to receive relatively high interest of about 10%, and conditioned it on a number of “other benefits.” But it appears what really interests Fortissimo is gaining control of Magnolia. The question is whether Markstone will be able to pay back Fortissimo quickly and retain control of the jewelry retailer.

The Magnolia deal is the least in an ongoing series of setbacks for the $800 million fund. Over the past decade, Markstone’s investors – mostly institutions from Israel and America – have seen Markstone’s three general partners (Ron Lubash, the recently deceased Amir Kess and the disgraced Elliott Broidy) take over $100 million in management fees from the fund, while generating a negative return for their investors. Last week, Markstone signed an agreement, pending the results of a due-diligence procedure, to sell Steimatzky to a group of investors, comprising the Kravitz office supply chain and Arledan Investments (the holding company that controls Keter Publishing House).

But Magnolia, acquired by Markstone for 140 million shekels in 2008, is an attractive investment – a profitable business with some 250 million shekels in sales in 2013. Magnolia made 35 million shekels in earnings before interest, taxes, depreciation and amortization (Ebitda) last year, so it could easily service the 50 million-shekel loan it took out from Mizrahi Tefahot Bank, so Fortissimo would not have to put any more capital into the business.

Markstone might be able to pay off the loan to Fortissimo and keep control of Magnolia by floating Magnolia shares on the AIM submarket of the London Stock Exchange. That’s a move Markstone has been eyeing for months, with plans to sell half of the retailer next month in an initial public offering that values the company at 300 million shekels. This would bring in at least 100 million shekels, enough to repay Fortissimo as well as pay back some of the creditors of the former Prisma Investment House – another Markstone investment that failed. But it is not clear what the chances of successfully conducting an offer in such a short time frame are, and at what price.

The alternative of selling Magnolia to a private investor is less promising. Knowing the condition Markstone is in and how badly it needs cash, buyers would drive a hard bargain for the chain.