Institutionals Stupefied by Flames as Dankner Burns Cash at Maariv

Is the cash burn in the best interests of IDB group shareholders?

The economic concentration committee's recommendations on publicly-traded subsidiaries of other companies should be scrapped, orated David Hodak this week. Hodak had been hired by the IDB group to write a position paper on the concentration committee's interim recommendations. He is also legal counsel to Maariv Holdings, which is owned by the IDB group.

The complex functions Hodak fulfills for Dankner demonstrate why limiting the voting power of controlling owners over "wedge companies" - public subsidiaries of public companies - should remain on the public agenda.

Maariv - David Bachar - 02122011
David Bachar

Given that institutional investors have not so much as been peeping, the relationship between Discount Investment and Maariv (which is not exactly in favor of Discount Investment shareholders ) bolsters the suspicion that only legislation can protect the rights of minority shareholders in companies belonging to a business pyramid.

Discount Investment, which is managed by Ami Erel, lost 60% of its value over the past 12 months. In comparison, the Tel Aviv Stock Exchange benchmark TA-100 index lost 17% in that time.

Four of Discount Investment's six bond series trade at yields exceeding 8%. The company, which just reported a quarterly NIS 1.4 billion loss, owes NIS 4.8 billion in net terms and recently had its credit rating downgraded by Midroog.

Yet Discount Investment's rapidly eroding shareholder equity and high bond yields did not deter its management from putting NIS 247 million into Maariv, by buying shares and extending loans. This now includes a new, five-year, NIS 50 million loan not secured by collateral at 4.5% interest - about half the yield of most of DIC's own bond series, and about a fifth the yield on Maariv's bonds (22% ).

Maariv received a similar NIS 50 million loan from Discount Investment just a month ago.

It could die

The decision to extend the loan was taken earlier this week in spite of Maariv's auditors warning of substantial doubt regarding its continued existence as a going concern, and despite Maariv itself expecting the need for additional infusions totaling NIS 74 million over the next two years.

None of this impelled the institutional investors to take legal action or any other steps to stop the rapid drain of cash, or to openly ask whether Discount Investment and its ownership were serving the interests of shareholders - or Dankner's personal objectives.

In the six-month period since June, the IDB group invested or loaned a quarter of a billion shekels in Maariv, a company that burned up NIS 51 million in the third quarter and that can be expected to devour many more tens of millions by the end of next year.

Discount Investment bondholders also refrained from taking any steps against company management despite the cash resources meant to service the company's debt being depleted to feed the Maariv inferno.

Maariv lost NIS 34 million in the third quarter, compared with a NIS 33 million loss in the third quarter of 2010.

Revenues from newspaper sales, advertising, and printing, totaling NIS 70 million, were down 9.6% from the same quarter last year.

The company's gross profit in the past quarter rose 25% against last year's third quarter to NIS 10.3 million - 14.7% of turnover compared with 10.6% the year before - the lower figure due to inventory write-downs in the third quarter of 2010, according to Maariv.

Nonetheless, Maariv reports that its payroll costs dropped in the latest quarter as a result of efficiency measures taken in the second quarter, but the savings were offset by reduced revenues.

Operating losses in the third quarter, totaling NIS 30.8 million, were 8.2% greater than for the parallel quarter last year, despite the increase in gross profit. This was due to a 9.8% increase in sales and marketing expenses, attributed to higher vehicle costs following a switch to operational leasing and to rising telemarketing and subscriber distribution costs amounting to NIS 27 million.

Administrative and general expenses were NIS 13.3 million for the quarter, 9.0% more than in the parallel period. Maariv also recorded NIS 718,000 in other expenses relating to preparations for closing down activities and good-will amortization.

Maariv's ongoing operations generated a NIS 51 million cash-flow deficit in the latest quarter, compared to an NIS 18 million deficit in the corresponding quarter.

With NIS 69 million in debt to holders of its C4 series convertible bonds, Maariv reveals in its report of expected cash flows that it anticipates a NIS 38 million deficit for the fourth quarter of 2011, and a total NIS 150 million deficit between October 2011 and September 2013.

Along with the NIS 91 million eaten up by its operations in the first nine months of this year, this points to Maariv incinerating - by its own estimation - a sum of NIS 241 million in cash from the beginning of 2011 until September 2013.

Maariv's forecasts are based on its business plan for the next two years, which includes several economizing measures being formulated, with the help of an outside consultant, for production, operations and distribution. The plan, however, still awaits approval by the company's board.

What investors should ask themselves

Discount Investment investors may want to ask themselves if the first step toward economizing, which will likely involve firing staff and cutting back salaries, should be the appointing of a NIS 2 million-a-year CEO.

Maariv assumes it will be short NIS 39 million in cash at the end of September 2013, notwithstanding its expectations of receiving a further NIS 74 million by then in bank loans or owners' loans.

The company points out that the banks won't extend it any further credit right now. The expectation for loans in 2012 and 2013, it says, is based on hitting its efficiency targets and having a NIS 157 million surplus of security to offer over existing credit. But the status of this surplus is questionable: It's based on an appraisal done for the company last January on the value of its property and equipment. An appraisal performed at the same time at the request of a bank, probably Bank Hapoalim, reflects a surplus of just NIS 90 million.