Babylon Moves Closer to a NASDAQ Issue - and an Exit

Babylon took another step yesterday toward issuing shares on the Nasdaq as its board met to address the preparations necessary for issuing shares in the United States.

Discussions included changing the Israeli company's rules so that it reports according to U.S. standards, increasing executive liability insurance coverage, and continuing on with the joint management by Noam Lanir and Alon Carmeli - a step that requires shareholder approval because they are relatives. Carmeli is married to Alon's sister.

It was another matter, however, that drew the attention of investors in Tel Aviv. The board is asking shareholders to give the controlling owner, Lanir, who holds 23.8%, and Reed Elsevier Ventures, which holds 18%, the option to sell shares when the placement occurs on Wall Street. This step is generally regarded negatively due to concerns that Lanir will lose his control of the company. Lanir today holds about 23.8% of Babylon's shares, following the acquisition a month ago of 40,000 shares from Shlomi Zaig, the company's CTO, for NIS 1.3 million.

A source at Babylon's management on Sunday stated that "the quantity of shares that the controlling owner and Reed Elsevier will sell - if they realize the option - will not exceed a third of the shares that the company will offer in its planned placement."

Considering most companies usually issue about 20% of their outstanding shares, it appears that Lanir and Elsevier will be able to sell shares worth an estimated NIS 100 million. This is based on the conservative assumption that the share price at the issuance will be NIS 32, based on the current share price on the TASE. The share price reacted Monday with a decline of 6%, on a large turnover of NIS 32 million.

Babylon's board announced a shareholders' meeting on November 20 for the purpose of approving the new conditions and finalizing the placement. The meeting will take place two months before the planned issuance in the United States. It is estimated that the issuance will be at a higher price than the share price in the Israeli market, which opened in the NIS 30 range yesterday.

Two and a half weeks ago. Babylon published for the first time a draft of the initial prospectus for the placement. The consortium will be led by Citigroup and Jefferies, and they will be joined by five banks - among them, UBS and Royal Bank of Canada.

Barring any delays, the placement is expected to take place before the end of the current year.

During the past month and a half, Babylon's investors have faced price volatility. Although the company did not publish any formal announcement, its share price declined 40% from its July 2012 peak within three weeks.

According to observers, what caused the shares to fall Sunday and previously was the slew of rumors about the company, among them the cancellation of the NASDAQ placement, a reduction in the number of users on the company website, and a change in Google's advertising policy (84% of Babylon's revenue comes from collaboration with Google ).

Nevertheless, the past four weeks saw a recovery in the share price - an increase of 20% - against the backdrop of a general recovery in world markets and fading concerns regarding a cancellation of the placement in the United States.

The trigger for the recovery was a technical cancellation of an agreement between Lanir and Elsevier - a technical step required for the sake of the placement, and regarded as favorable for the Tel Aviv investors.

Babylon has transformed itself during the past several years from a developer and marketer of translation programs into an online information marketer. In contrast to content providers like Walla and Ynet, which use their web exposure to sell advertising space to various companies, Babylon concentrates on a business model that refers online users to worldwide search engines - for example, Google - and then receives payment for each click.