Ben-Dov Restructuring Tao Tsuot Debt

Bondholders appalled, bonds drop 7.5%; stockholders cheer, shares rise 18%

Tao Tsuot stock soared 18% and its bonds tanked after the company advised of a proposal to restructure its debt.

Ilan Ben-Dov, the controlling shareholder, owns 70% of the company's stock.

Ofer Vaknin

Investors spent hours trying to figure out his proposal, but the bottom line is that their fears have come true. Tao Tsuot owes creditors somewhere from NIS 500 million to NIS 600 million and doesn't have the liquid assets to pay them.

With that, Ben-Dov joins the list of tycoons resorting to restructuring debt. The list includes Idan Ofer (Zim Integrated Shipping Services ), Lev Leviev (Africa Israel Investments ), Beny Steinmetz (Scorpio and the Bateman group ) and Leon Recanati (Gmul Investments ).

A new Tao Tsuot

Ben-Dov is now proposing that the holders of B2 and B3 bonds convert them into 25% of stock in Tao Tsuot, which will be a different company after the arrangement.

These bondholders are owed NIS 400 million.

Evidently investors were uncharmed. Tao Tsuot bonds sank 7.5% yesterday.

Stockholders were delighted, however: The company's stock jumped 18%.

The new Tao would own 50% of its sister company Suny Electronics (which is presently controlled by Ben-Dov himself, with a 70% holding ). Therefore, his direct holding in Suny would drop to 20%.

However, after all is done, Tao would effectively hold 64% of Suny, including dormant Suny shares that Suny itself holds. Theoretically the dormant shares could be voided, reducing Suny's share capital and increasing Tao's effective stake in the company.

All the moves are dependent on the bondholders' approval.

Tao Tsuot CEO Yossi Arad said yesterday that following the move, Tao would become a company worth more than a billion shekels, with no liabilities. "At the end of the process, the company's bondholders would become stockholders of a strong company with substantial assets," he said.

Heavy losses

Tao Tsuot has lost NIS 734.5 million over the course of three years and three months.

On Sunday, Tao suspended an offer to convert B2 convertible bonds into a new series, B9 bonds. It owes B2 bondholders NIS 312 million. Ben-Dov himself owns NIS 92 million of that series.

The B2 convertible bonds have a duration of six months. They have been trading at junk yields of 16%.

At the end of the year, Tao Tsuot is supposed to repay all principal and interest on the bonds, which are not backed by any bank guarantees. As of the first quarter's end, Tau Tsuot had NIS 2.6 million in cash and cash equivalents. Where it would find the wherewithal to make its payments is unclear.

For some six months the company has been in noncompliance with the listing rules of the Tel Aviv Stock Exchange, in that its shareholder equity was lower than the minimum of NIS 2 million for four quarters running. It had a shareholder equity deficit of NIS 356 million.

Four days ago the TASE management gave the company an extension - its final one - to meet its listing requirements, or have its shares moved to the Maintenance List (one stage before being delisted ).

Tao has been struggling for years. In the last three years it suffered heavy losses after real estate holdings in eastern Europe, which it bought during the property boom, shrank in value. For the first quarter of 2011 Tao posted a loss of NIS 7.5 million, adding to its loss of NIS 83.6 million in 2010, NIS 154 million in 2009 and NIS 490 million in 2008.

The company lost NIS 734.5 million over that period.

In 2010 the company sold some of its holdings in real estate companies, hoping to stop the bleed. In January 2010 it sold its holdings in Azorim for NIS 36.8 million. In September 2010 it sold its holdings in Eliezer Fishman's companies Darban Investments and Industrial Buildings.

Its main remaining holdings are in Suny (7.42% ), a sister company that indirectly owns the controlling interest in Partner Communications, and in ICP Israel Citrus Plantations (26.44% ). From the start of the year, Tao Tsuot stock has lost 50%, reducing its market cap to NIS 43 million.

From game importer to cellular tycoon

Ilan Ben-Dov is one of the richer people in Israel. His personal fortune is estimated at $330 million to $350 million. Ben-Dov controls mobile operator Partner, the local importer of Samsung cell phones, the website Tapuz, and various financial and real estate holdings. All told, he manages a balance sheet of NIS 16.2 billion as of the end of the first quarter, and the companies he controls are worth billions.

Ben-Dov started his business career in 1991 when he founded Suny, then the importer of Sega games. That year, Suny had revenues of NIS 8 million and profits of NIS 300,000. In 1993, after the games took off, Suny made NIS 1.3 million in profits, and Ben-Dov decided to go public on the Tel Aviv Stock Exchange. He raised NIS 4 million from private investors, and later took advantage of the rising market to raise another NIS 20 million at a company value of NIS 80 million.

But his big step up came in 1998, when Samsung granted him its Israeli franchise license. As the cellular industry expanded, Ben-Dov became a multimillionaire. Suny is now worth more than NIS 1 billion.

Ben-Dov decided to buy an investment firm named Yarden Investment, which he renamed Tao Tsuot, as in the Chinese tao, meaning way or path. He used Tao to invest in companies specializing in real estate in Eastern Europe, and the real estate crisis in 2008 hurt Tao badly.

In a surprise move in 2009, Ben-Dov decided to buy Partner, paying NIS 5.29 billion for a 51% share. He ran up huge debts to the banks and bondholders to pay for Partner, using a company he owned, Scailex. To cover these debts, he has turned Partner into a cash cow through dividends. (Eran Azran)