Analysis

Will Shaul Elovitch Go the Way of Other Fallen Tycoons?

Plunging share prices for his Bezeq group since start of securities probe last week signal investor worries. But even with NIS 1 billion in debt, his empire looks pretty sturdy

Shaul Elovitch
Ofer Vaknin

The shares of the Elovitch group of companies have posted steady declines since news of the Israel Securities Authority investigation against the group surfaced last week, amid concerns about whether the companies can service some 1 billion shekels ($280 million) in debt.

With one tycoon after another collapsing in the face of unpayable debt – the latest being Eliezer Fishman, who was declared bankrupt last week just as the Elovitch probe emerged – investors have reason to be leery.

All the more so because of the focus of the Securities Authority probe is the 2015 sale of Shaul Elovitchs majority stake in the satellite television provider Yes to Bezeq, Israels biggest telecommunications company and the centerpiece of the group.

Elovitch's empire

The 680 million shekels in proceeds from the sale, which investigators suspect was done at an inflated price, went to paying down part of the debt owed by Eurocom, his closely held investment vehicle. The proceeds from the Yes deal were equal to what would be his share if Bezeq paid out a massive 7 billion shekels in dividends.

Elovitch will probably have to divest assets to pay debt, sources closed to Eurocom told TheMarker. He was selling assets even before the probe got underway. The top candidates for sale are outside his core Bezeq group and include Spacecom (the satellite operator), Enlight (an alternative energy company), private controlled real estate holdings and Satcom Systems (an overseas communications provider).

All told, these stakes could fetch 500 million shekels, so long as Elovitch isnt under pressure to cash out quickly to prevent him from getting the best valuation. If that were the case, he would also have the option of divesting shares in Internet Gold, which is part of the Bezeq group.

But the Elovitch empire is in good shape on balance. Shaul and his brother Joseph, who share control of Eurocom on an 80-20 basis, have not personally guaranteed any of the debt, as Nochi Dankner did for his IDB group, sources close to the two said. Nor do they have any personal debt with the banks.

Elovitch understood his debt problem and over the last few years did amazing things to reduce it, said one stock market analyst, who asked not to be identified.

The condition of the two companies I manage is very good, said Doron Turgeman, who is CEO of Internet Gold and its B Communications subsidiary, which in turn controls Bezeq. He noted that the repayment schedule for their bonds is spread out over years and one of the shares has been pledged as collateral

The two companies have very positive net asset values, their debt ratings are high and have financial flexibility, he added, noting the B Coms NAV is still 2 billion shekels, even after Bezeqs share price has fallen 10.6% in the past week.

On Sunday alone, Bezeq stock lost 3.9% to end at 5.79 shekels. B Comm shares plunged 7.5% to 33.40, bringing its drop since the start of the Securities Authority probe to 16.3%, while Internet Golds stock dropped 7.5% to 63.90, a 17% decline in the past week.

Thats a double-digit decline, but the analyst said there was no reason to be worried, and that Bezeq would continue generating the dividends the Elovitch group needs to meet its debt repayments.

Bezeq is a pretty good company and it will survive because its core income is very stable and they have seen off the competition, the analyst said. The only threat it faces is changing regulation – and until today that has worked in its favor. ... Only if the regulators really succeed in creating competition will Bezeq have a problem.

Although some Bezeq executives have been questioned in the probe, the analyst said it was unlikely to lead to a wide-ranging shake-up at the top of the company, which would hurt it.

At the top of the Elovitch pyramid, his closely held Eurocom Communications is believed to have 600 million to 700 million in debt, nearly all if split evenly between Bank Hapoalim and Israel Discount Bank. His Eurocom Real Estate company has another 260 million in debt to a consortium led by Mizrahi Tefahot Bank.

Internet Gold has net debt of 580 million shekels after discounting some 220 million in cash, the lions share of which is in long-term bonds. It could sell off as much as 14.6% of B Comm, now worth 280 million shekels, without losing control of the company. All told that adds up to enough cash to get it through repayments at least to the start of the year 2020.

B Comm has a much bigger debt pile. It has 2 billion shekels in bonds issued last September, which carry an interest rate of just 3.6%, much lower than the 8% dollar debt it replaced. The company also has another 540 million shekels in bonds, but it also has 450 million in cash and could sell up to 200 million of Bezeq shares without losing control. That all provides a cushion for repayments to the stat of 2020.

Elovitchs major headache is the inability of Internet Gold to raise new debt. The investigation forced the company last week to pull a bond sale of up to 200 million shekels.

The bonds were to be sold to institutions and nontradables, part of a gradual process of delisting the company from the Tel Aviv Stock Exchange and putting the group into conformity with the Business Concentration Law that aims to scale back pyramid groups like Elovitchs.

Without the ability to tap the local bond market, Internet Gold will have to try and get financing elsewhere, probably from foreign banks or institutional investors, which will almost certainly be more expensive.