Ilan-Ben Dov, controlling owner of Partner Communications, said Tuesday he realized six months ago that his debts linked to his stake in the cellphone operator were getting him down.
This week, Ben-Dov reached an agreement to sell control of Partner back to Hutchison Whampoa, which the Israeli businessman still owes $300 million after his 2009 acquisition of Partner from the Hong Kong conglomerate in a leveraged buyout.
Tuesday, after three days of rumors and leaks, Ben-Dov's Scailex released a statement explaining how it would relinquish control of Partner.
"In this situation, in order to prevent the collapse of all my businesses, I did the maximum possible for the bondholders and shareholders of Suny, Scailex and Partner, as well as for the employees, suppliers and customers," Ben-Dov told TheMarker after returning from the negotiations in Hong Kong. "Life is complicated and made up of compromises. I realized half a year ago that this whole story was too big for me."
In the announcement to the Tel Aviv Stock Exchange, Scailex detailed how Hutchison would acquire a 75% stake in Scailex, Partner's parent, for $125 million in cash. Partner operates under the Orange brand in Israel.
Scailex's parent, Suny Electronic, is selling the 75% stake. It had said Sunday that talks were taking place, and the deal was signed late Monday night. Ben-Dov is expected to keep a 3.7% stake in Scailex, and Suny will own 3.6%. The remaining shares are in public hands. Ben-Dov owns 80% of Suny.
Hutchison sold its controlling stake in Partner, Israel's second-largest mobile phone operator, to Scailex for $1.38 billion, or $17.50 a share, in 2009. That is well above Partner's closing price of $4.99 on Nasdaq on Monday. Hutchison controlled Partner from its founding in 1997 until the sale three years ago.
That purchase price included $1.08 billion in cash and a $300 million secured loan to Scailex. As part of the latest agreement, Hutchison agreed to extend repayment of the loan by three years to April 2017, Scailex said in its statement. Interest on the loan will remain at the original 2.5%.
Scailex had expected to finance the loan with dividend payments from Partner. But Partner, which has seen its profit fall sharply, last paid a dividend in the third quarter of 2011.
Shares in Partner rose 3% to NIS 19.41 on the TASE yesterday, after gaining 6% on Monday. Scailex holds 44.54% of Partner's shares. Scailex shares surged 27.7% yesterday, returning to trading after a halt on Sunday. Suny shares soared 129% yesterday on 14 times their average turnover.
Debt-laden Scailex is the sole importer of Samsung mobile handsets in Israel. Scailex said it would sell its Samsung import activities to Suny, which is controlled by Ben-Dov, for $100 million.
But this part of the deal will require a special majority of shareholders for approval, since it will be considered a transaction between interested parties. The Samsung import franchise was valued at NIS 600 million with an annual cash flow of NIS 125 million to NIS 150 million, when Ben-Dov recently tried to find a partner to help bail him out.
Not a done deal
Ben-Dov is Partner's chairman, but will be replaced soon by Amikam Cohen, who was Partner's CEO until 2006. He left the company to work for Hutchison, who is now sending him back to Israel to supervise the firm he knows so well.
Scailex also said it will offer to buy back at least 50% of its non-convertible bonds at 69% of their total value, a price NIS 0.09 higher than the bonds' closing prices on the last trading day before the announcement of the deal, Hutchison said in a statement.
But Scailex bondholders could turn the deal down, said Hutchison. The sale of the Samsung mobile handset business also needs approval of bondholders, the two boards and shareholders, said Dan Eldar, a representative of Hutchison in Israel, speaking on a conference call. Eldar served as a vice president of Partner under Cohen.
The deal with Hutchison is partly conditional on the success of the bond buyback. Scailex has debts of $760 million, including the $300 million owed to Hutchison.
Yields on Scailex bonds have risen to junk levels, which prevented Scailex from rolling over debt with new bonds. Mizrahi-Tefahot Bank will also have to approve the sale of the Samsung franchise to Suny.
The deal will also require regulatory approval. The Communications Ministry is unlikely to cause problems, but an Israeli firm or institution will be required to own at least 5% of Partner. The transaction will also require antitrust approval.
If the deal is not finalized, Suny will be required to pay Hutchison a $5 million penalty.
Israel's cellphone market has recently faced cutthroat competition, partly due to deregulation that has put pressure on Partner's earnings and share price.
The Israeli government has forced mobile operators to slash fees they charge each other to connect calls and to scrap exit fines for customers. The government has also issued new licenses to stir up competition and push prices down in a market dominated for more than 12 years by just three companies.
"Hutchison believes in doing business in Israel; it believes there is an opportunity in the cellular market in Israel," said Eldar. "We believe we know how to create value in holding Partner."
Hutchison's purchase is not a debt restructuring deal, Eldar added. "Hutchison is not responsible for Scailex's debts," he said.
Ben-Dov flew to Hong Kong with his attorney Yossi Avraham for the meetings with Hutchison last week. The Hong Kong-based company is represented in Israel by attorneys Ehud Sol and Ilanit Landesman Yogev, both partners at Herzog, Fox & Neeman. Goldman Sachs advised Hutchison on the deal.
Bank Leumi owns just under 5% of Partner and has had to write down about NIS 300 million of its NIS 515 million investment.
Tsahi Avraham, an analyst at brokerage Clal Finance, said the news was positive for Partner. "Hutchison's positive reputation, accumulated during the years of building Partner, together with its financial strength, give the company breathing space," he said.
Avraham expects one of Hutchison's first decisions will be to cut Partner's dividend payments to 25% to 30% of net profit and perhaps cancel them for the time being.
Hutchison, which operates 13 cellular networks worldwide, is also building a desalination facility in Israel, together with desalination firm IDE. It will be among the largest in the world.
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