Kibbutz Sdot Yam: From Bankruptcy to Nasdaq

Bad management and a gamble on untried technology nearly killed it, yet like a phoenix, it rose from ashes.

"The first thing I noticed was that the kibbutz was living beyond its means," recalls Gili Amir of his first days as kibbutz secretary of Sdot Yam at the beginning of 1988. "Talking to the treasurer I found out the kibbutz was actually bankrupt. The only way he could provide for its 700 residents was by taking extortionate gray market loans."

A probe by the kibbutz movement confirmed what had long been swept under the rug: Sdot Yam was drowning in debt and couldn't meet its obligations. The kibbutz members were stunned.

Itzik Ben-Malki

Today, 23 years later, Sdot Yam is again absorbed in fateful economic decisions, but of a different sort. The story of its metamorphosis is the story of Caesar Stone.

Members of the kibbutz are grappling with plans to issue Caesar Stone shares in New York: Is the timing right or should it wait until better financial results are achieved? Should the company be valued at $600 million or should they settle for $400 million? And how will the money affect lifestyle at the kibbutz, which is still run collectively?

"They used to say that if Sdot Yam started a factory to make death shawls, people would stop dying," quips Ahuvia Lutzki, the kibbutz treasurer and former general manager of Caesar Stone. Now the company is among the most successful kibbutz enterprises. Sdot Yam, which was one of the first kibbutzim to undergo a deep financial crisis, is now one of the richest.

Stories about who was responsible for the former mess and who led the way to success are as numerous as the kibbutz members.

Caesar Stone was founded by Amos Amir, Gili Amir's father and CEO of Caesaria Marble, Sdot Yam's floor tiles plant, in the 1970s. He had come to the conclusion that the days of Terrazzo flooring, made up of small chips of stone set in concrete, had passed, and that the kibbutz couldn't survive on $6 million in turnover a year. So he began searching for the next generation of flooring material: thinner, lighter, and stronger, while being less labor intensive and polluting to produce.

A laboratory was established on the kibbutz while Amir traveled in search of new production technologies.

Amir, in visiting dozens of factories in Europe, established close contact with one in particular, Breton, in the small town of Castello di Godego, in northeast Italy, not far from Venice. The company produced stone surfaces using polyester to bind the ground bits of stone. The production process made the stone dense and impermeable.

Amir bought a production line from Breton. Once, during the course of negotiations, at a dinner a dinner in Castello di Godego with the liquor flowing, Amir found himself in the company of a Syrian businessman who was complaining that the strength of the Breton stone didn't satisfy his client. Through the booze-filled mist Amir suggested applying harder substances to the uppermost layer like quartz and basalt to prevent erosion.

The Syrian took Amir's suggestion, and when Amir returned home and told his colleagues the story, they also decided to adopt the idea - much to his dismay. He thought the method was far from ready to implement.

At the end of 1986, while Amir was in Paris following his mother's death, an upheaval was taking place on the kibbutz. On his return to Sdot Yam two months later - with the opening of the new factory just a month away, he was told that the launch team for the plant had decided to completely change the production process without any in-depth testing.

The aim was to replace marble, a natural stone with a Mohs hardness rating of 3 on a scale of 0 to 10, with a synthetic substance based on quartz, with a hardness rating of 7. Using quartz it would be possible to produce denser material that would be impermeable and stain resistant.

Caesar Stone was reestablished as a company manufacturing flooring and surfacing material on the basis of 93% quartz and 7% polymers and additives.

Amos Amir couldn't bear the insult of being dismissed. Unready to share responsibility for what seemed to him a risky and careless adventure centered on an industrial misconception, he left the kibbutz. The intuition of the young people running the plant to gamble on an unfamiliar production process would later prove to be brilliant, but Sdot Yam paid a heavy price for many years - it nearly brought down the kibbutz.

The quartz, harder than any mineral except diamonds, sapphires, and topaz, quickly wore out machinery designed to be fed softer substances. The machines couldn't deal with the quartz properly, the finished product sagged, and to top it off, the polyester, which was meant to hold the product together, wouldn't adhere easily to the quartz.

The opening of the Caesar Stone factory in March 1987 was accompanied by what was then considered an extravagant publicity campaign, but the festive facade concealed grave apprehension. "The plant was about a year behind in its business plan and the launch took place before the product's development process was complete," says Lutzki.

The publicity campaign bore fruit, but this wasn't necessarily good for Sdot Yam. The company, still unable to get its production running smoothly, couldn't meet the demand generated by the hoopla and its product quality was crude.

Even worse, when they tried laying it in tiles the kibbutzniks discovered that the quartz wouldn't bind to adhesives or cement so the product couldn't be applied the normal way.

One notable fiasco at the outset was a project for covering a wall at an exclusive Eilat hotel in 1987. Extreme variation in the temperature of the wall between day and night in the sunny city caused the panels to fall apart shortly after being installed.

Caesar Stone was forced to ship the material back to its factory and then had to deal with being slapped by a lawsuit over the project - and for others. A year's production went to waste, and the company and kibbutz absorbed enormous losses.

It seemed the plant had been thrown into total chaos and management had no control over the production process or dealing with complaints. Sdot Yam was immersed in losses. The United Kibbutz Movement Fund, which guaranteed Sdot Yam's debt as it did for other kibbutzim, appointed an audit team.

The audit revealed a situation that kibbutz members weren't aware of: The kibbutz treasurer, pressured to supply sufficient cash to stave off the banks, provide for the daily needs of 700 kibbutz residents, and close the huge deficit in the new plant's cash flow, had resorted to taking loans in the gray market at exorbitant interest.

The audit report at once shut the flow of cash into Sdot Yam. But the kibbutz had been addicted to easy money for years. Going cold turkey occurred at a critical time for Caesar Stone: The company required non-stop infusions of funds to mollify outraged customers and develop its technology at the same time.

In 1988, with the kibbutz in the throes of a desperate financial crisis, repossession agents appeared and shut the factory, intending to cart away the machinery. But the members decided to put up a fight.

"After locking the agents inside the factory, we climbed on the roof and then slithered inside to empty the cash box," recalls Gili Amir. "In the meantime we negotiated with the lawyers, and I promised them that Kibbutz Sdot Yam will repay its debt to the last penny."

It is likely that Caesar Stone wouldn't have gotten as far as it has, and that Sdot Yam wouldn't have survived, if the UKM Fund hadn't stepped in to put an end to the most serious affliction: gray market loans that swelled at a frenetic pace. The UKM converting the gray loans into debt with easier terms.

"Sdot Yam adopted an austerity regimen: There was nothing in the kibbutz store to buy. Street lights were turned off," says Amir.

Sdot Yam also owes its gratitude to its neighbor to the north, kibbutz Ma'agan Michael, owner the successful Plasson Industries, which provided employment for 25 Sdot Yam members, as well as for others in kibbutz agricultural enterprises.

The patronage of the UKM and Ma'agan Michael helped Sdot Yam survive its economic trauma at minimal standard of living, but it wasn't enough to cure Caesar Stone's operational and cash flow woes.

"A group of young people that came to join the kibbutz believed in its potential and in performing Sisyphean tasks, and step-by-step they managed to turn the business around," says Amir. "The most notable among them were Amir Rotem, the plant's general manager; Ahuvia Lutzki, who served two terms as general manager; and Giora Wegman, then vice president for operations and research and development, and currently deputy general manager.

The key to Caesar Stone's success was the overall settlement of the kibbutz debt to the banks. In February 2000, after three years of negotiations, an arrangement was signed with eight banks and the government for the kibbutz to pay off its debt in 13 annual installments of NIS 5.5 million each and by relinquishing 170 dunams of land (42 acres ) near Binyamina. The banks wrote off NIS 300 million of Sdot Yam's debt, equivalent to NIS 382 million in current inflation-adjusted terms.

The settlement paved the way for the complete separation between the finances of the kibbutz and the company. More importantly, it enabled the company to build and put into operation a second production line in the first quarter of 2002 that led to sales jumping 70% that year, compared to 2001. The higher sales were also attributable to renewed efforts in penetrating international markets that had been neglected until the end of the 1990s after having inflicted losses.

Amir Rotem's activities as marketing manager led to the development of markets for Caesar Stone products through connections with Stone Italiana in Italy and Erbi in Holland and Germany, people who believed in the product, but the export breakthrough was mainly achieved thanks to the Australian market, which surprisingly became the company's most important export market.

The intensity of the jump in demand caught Caesar Stone by surprise, and in 2003, management began planning an additional production line at a $25 million investment that opened in October 2005.

But Sdot Yam concluded it would need to spread the financial risk involved in Caesar Stone's being its only economic asset by taking in a partner. In July 2006, Tene Kibbutz Industries Investment Fund Limited Partnership invested $25 million in Caesar Stone in exchange for 21.7% of its shares, enabling the company to build a fourth production line.

Output capacity of the company's four production lines now reaches two million square meters of product a year. The sharp rise in capacity, made possible by the debt arrangement with the banks and the removal of financial obstacles, generated an annual 30% expansion rate 2002 and 2008 and raised Caesar Stone's sales to NIS 600 million in 2008.

The strong growth in turnover and the larger sums of cash available also helped Caesar Stone expand in overseas markets. Its April 2008 purchase of a distribution network in Australia, the company's foremost export market, was a major step in its goal of establishing a greater international presence.

Raising capital on the Nasdaq exchange could be the solution for many of Sdot Yam's problems, but everyone is convinced that the move would be free of pitfalls. A share issue would help Caesar Stone to fund the increase of its 25% share in a U.S. company that contributes 20% to 25% of its revenues but remains unable to fulfill its market potential and lags after its competitors. The capital raised could also enable the company to get a foothold in other markets like Brazil, India, or China.

Sdot Yam is convinced that its technology is a winner, but giant companies like DuPont in the U.S. and Korea's LG are also heavily involved in the industry with their own excellent products. DuPont's Corian brand, for instance, is a non-porous solid surface material. Sdot Yam's oversight in not having registered a patent on its technology, and Breton not protecting its own know-how, allowed other companies to develop their own versions of the Caesar Stone product and take over the U.S. market - Cosentino of Spain for one, with its Silestone brand.

Caesar Stone also faces challenging competition in Australia from Smartstone, led by Ken Kalpou, who joined the company after having built up Caesar Stone's Australian operations.

One kibbutz member anxious over the ramifications of a share issue on Nasdaq is Gili Amir himself. "The IPO will cover daily necessities and allow members to grow old with dignity by increasing their pensions and providing for nursing care. Members' budget allowances could also be raised, but the volume of money raining down on Sdot Yam could lead us in an undesirable direction," he says.

Amir's worries are based on what he sees on other kibbutzim: "A traditional kibbutz about the size of Sdot Yam probably throws about NIS 6 million to NIS 7 million at kibbutz administration," he says in revulsion to the tendency of kibbutzim toward superficial and wasteful problem solving. "I estimate that there are 30 to 40 kibbutzim that solve all their problems with money, some already for the last 40 years, while here this has been going on for only eight years now."

Amir adds: "Even now dozens of millions of shekels a year are being spilled for the needs of 700 people, and it's been many years since Sdot Yam has absorbed new members." He noted that since people are reluctant to leave a kibbutz that is successful economically, there is little turnover and the community suffers from having a stagnant population.

It's hard to find agreement among the people of Sdot Yam on the question of why Caesar Stone floundered in its formative years, and particularly on the question of which members were responsible for its turnaround and dizzying success.

But there's a broad consensus that one of the main beneficiaries of the reversal is Ariel Halperin, senior managing partner at Tene Investment Funds, a private fund whose specialization is kibbutz industry investments.

Sdot Yam was among the first kibbutzim traumatized by having its credit cut off, assets sold and standard of living drastically curtailed. Halperin stood by the kibbutz as it adamantly fought off attempts by its bank creditors to appoint a kibbutz manager on their behalf who would wield exclusive signing privileges.

Nearly 20 years later, in February 2006, Halperin led the Tene Fund in buying 21.7% of Caesar Stone's shares for $25 million, placing the company's pre-money valuation at $90 million. Tene Fund also received an option for 5% of the company's shares at the same valuation which it exercised at the end of 2010.

A clause in Tene Fund's investment agreement with Sdot Yam states that Caesar Stone will embark on a public share offering upon being valued in an underwriting offer at $175 million or three years from the partner's investment, whichever comes earlier.

The IPO illustrates the clear conflict of interests between a private limited life investment fund like Tene - which automatically dissolves after seven years and therefore has an interest in taking the company public and selling its shares at the highest possible price within a set time frame - and the kibbutz, which will remain in control of Caesar Stone and has no interest in divesting at any particular time, if ever.

"There wasn't any discussion on the IPO's effect on the future of the kibbutz as a collective community or if Caesar Stone needs the money," says one of the kibbutz old-timers. "Neither was there a discussion on what will happen if Tene and the underwriters sell investors on a pipe dream and Caesar Stone can't match their expectations - like if the Australian dollar returns to being worth less than the American dollar."