Struggle Over Tadiran: Investors vs Elbit

Last Thursday, the Tadiran Communications (TASE: TDCM)  board of directors convened for a what was supposed to be a routine meeting on technical matters. The result was a bust-up that might cost the company's controlling shareholder - Elbit Systems (Nasdaq: ESLT)  dearly.

The issue at stake was whether Elbit Systems should sweeten its tender offer, released a month ago, to buy all outstanding shares in Tadiran.

Elbit Systems, controlled by Mickey Federmann and managed by Yossi Ackerman, wants to delist Tadiran in order to facilitate the merger of the two companies, and to lower costs. Also, Tadiran is sitting on $310 million cash, which would do nicely (from Elbit's view) to finance the stock repurchase.

The law requires the board of the acquired company to state whether the directors really think the tender offer is in the company's best interests, and that of its shareholders. Then the directors shape their recommendation.

In other words, the directors have to decide whether to accept the offer and sell all the company's shares to the buyer, or to reject it, possibly in anticipation of a higher price, or to deflect the offer entirely.

The board can decide not to have an opinion, though, which is what the Tadiran board did.

"Given the complexity of what the company does and the period of time set in law, the board cannot solicit an external, comprehensive economic opinion including pricing appraisals by the deadline," the Tadiran board explained.

But the board didn't abandon the issue: it demanded that Elbit Systems reveal two deals Tadiran has brewing, which the Elbit Systems owners knew about when publishing their offer, but about which investors had no information.

The two deals were big ones, amounting to some $200 million, at the very least.

No rubber stamps

The Tadiran external directors spelled it out: they would not be faceless rubber stamps. Evidently they thought Elbit Systems was offering too little.

After the meeting, capital market sources speculated that Elbit Systems would have to seriously sweeten its offer, from NIS 186 per Tadiran share to NIS 230 (24%). Or, it could step away and abandon the whole idea.

Ackerman and two other directors at Tadiran who also work at Elbit Systems did not take part in the meeting.

Elbit Systems bought the controlling interest in Tadiran a year and a half ago. It owns 42.8% of the company's shares. Institutional investors and households own the rest. A full tender offer for all outstanding shares would cost NIS 1.3 billion at the share price of NIS 186. If the price is raised to NIS 230, it will cost Elbit Systems NIS 1.65 billion, or, an extra NIS 350 million for the minority shareholders in Tadiran.

The deadline for the shareholders to accept the tender offer is this weekend.

One project for which Tadiran awaits final approval is a joint deal with Siemens, to make fast trains for China. It is a vast deal that could bring the Israeli company (via subsidiaries Telefunken Racoms) 50-60 million euros, at first, and another 30-40 million euros at a second stage. Telefunken Racoms would be responsible for the fast train's monitoring and control systems.

Then there's a 60-70 million euro deal to supply military communications equipment to a western European country. The customers approval is expected within weeks. Sources at the company are more confident about the Chinese deal than this one.

Tadiran is considered to be one of Israel's most successful military-industry companies. It develops cutting-edge technology and is also sitting on a pile of cash, turning it into a highly attractive target for investors.  So is Elbit Systems offering enough?

"Even now its share price is trading at NIS 190," points out a financial market source. "Investors voted with their feet and showed Elbit Systems what they thought of its offer. The market expects Elbit Systems to significantly lift its offer, to NIS 230 per share, or to withdraw from the whole thing."

An Elbit Systems spokesperson firmly denied that the company had even mulled the notion of hiding the two transactions. The spokesmen said they were deals that didn't need to be reported during the regular course of business, and that the board members unanimously decided to reveal them because of the tender offer.

The spokesperson added that Elbit Systems' representatives on the Tadiran board had not taken part in said meeting, which, insofar as they know, was conducted amicably and with full consensus.