Battle Lines Being Drawn Over Ormat

Somebody has to lose as cultures clash: Wall Street sharks slam into the Bronickis from Yavne.

Until now, the entrance of Chaim Katzman and Dori Segal into the renewable-energy company Ormat Industries had seemed nonviolent. Yehudit "Dita" Bronicki even attended Katzman's New Year holiday toast. But on Monday it became clear that the wrestling match between the pairs of Dita and Lucien Bronicki, founders and leaders of the company, against Katzman and Segal is going to be one of the hot tickets of the fall.

Two things happened on Monday. Each seemed trivial enough, but they portend a major battle in the offing.

The first was that Investor Relations admitted that its relations with Ormat had been terminated because of a conflict of interest. Investor Relations had worked with both Tel Aviv-listed Ormat and Gazit, the real estate empire Katzman and Segal control. The fact that Ormat fired Investor Relations after all that time suggests the Bronickis are not smiling on Gazit.

The second development was the huge NIS 68 million volume of trade in Ormat shares on Monday. Assuming that the buyers weren't from Gazit, it indicates another major player eyeing Ormat. If until now only the Bronickis had been stressed about the Gazit people soaking up Ormat shares, Monday was the day on which the Gazitites started to sweat too.

So far Katzman and Segal have invested NIS 1.1 billion in Ormat, which lifted the company's stock to new heights and the company's market cap past $1.5 billion. But the development caused anxiety among the two founders, a husband-and-wife team that has created a global empire based on geothermal energy, recovered-heat technology and other forms of "green" electricity production.

The Bronickis' fear is understandable: for the first time, they are in mortal danger of losing control over their life's work.

Ormat is a meeting-place between two very different cultures: the industrialist visionaries from Yavne versus Wall Street.

Three hints raise the Bronickis' anxiety level even higher. First, Katzman and Segal didn't announce they were ceasing to buy Ormat shares. On the contrary, they announced they wanted co-control. We may assume that any proposals Gazit may have tendered were rejected. Second, Katzman and Segal announced intentions to massively invest in green energy, and Ormat would be a perfect platform for the dynamic real estate barons. And finally, Katzman's personal history is studded with takeovers, achieved and attempted.

The Bronickis own a relatively small controlling share of 28 percent, while Katzman and Segal have already built up a stake of 17 percent. The remainder, more than 50 percent, is held by institutional investors - mutual funds and insurance companies, for instance, and by the public. During their sweep, the Gazitites soaked up every Ormat share to be had on the market. What's left is the hard core of investors who don't want to sell, mainly because they smell a control battle. In fact, some players even beefed up their stake in Ormat in eager anticipation of that very thing.

Make no mistake, the Bronickis are no underdogs. Ormat's meteoric growth has lifted the value of the shares they own to NIS 1.8 billion. But we may assume they hadn't planned to spend 2008 fighting for their title as the company's controlling shareholders.

One option would be for them to capitulate and sell their shares, but that doesn't seem to be on their to-do list. Or, they could offer the Katzmanites some sort of control and management agreement. But that doesn't seem terribly realistic either. If they had been thinking in that direction, they'd probably have stayed with Investor Relations.

The main obstacle the Bronickis face is that they aren't positioned to launch a massive buying sweep of their own: it would cost them a fortune and they'd lose. Katzman and Segal have deep pockets. They control a group with a balance sheet of NIS 36 billion, they have a billion-dollar cash kitty and excellent access to the capital market. They therefore have practically unlimited ability to continue buying Ormat shares on the market.

The Bronickis could accept an attachment to their shares and borrow, but whatever they buy, Gazit can buy more. Jousting with wallets won't work for them.

The Bronickis could always involve a friendly third party in a control-sharing accord: the party could also pick up shares on the market and buy a chunk of the company's stock directly. Perhaps that's exactly what happened on Monday - a third party may have bought shares. Again, though, Gazit could counter by demanding a share in the stock allocation. Even so, a third party would be an unwelcome development for Katzman and Segal.

It isn't as though the situation is that simple for Gazit either. Gazit has become significantly exposed to Ormat: it has NIS 1.1 billion worth of the company's shares. Gazit also owns NIS 3 billion worth of Gazit Globe shares.

The Gazit people could remain with their 17 percent holding, sit tight and watch the company develop. Even if they don't have an agreement in place with the Bronickis, both groups have similar interests: they want Ormat to grow and go onto better things.

But they have an enormous shareholding and even if the share price rises, they may not be able to shed the stake that easily. Secondly, if the Bronickis go and close a deal with a third party, they could be left with an asset worth less. And third, they aren't used to being passive.

One possibility is that Ormat closes a deal with a third party, and Gazit sells its shares to that party at a profit of, say, for the sake of argument, a quarter-billion shekels. Now that they realize the Bronickis aren't about to willingly curl up with them, they may even be banking on that scenario.

As far as the Bronickis are concerned, the root of all evil is the convertible bond issue that Ormat carried out, in order to buy more and more geothermal power stations around the world. Altogether Ormat has invested more than half a billion dollars in such stations. But, the conversion price of the bonds was too low.

For instance, in mid-2003 Ormat issued a series of 7-year convertible bonds, raising more than NIS 200 million. The bonds were issued at a conversion rate of NIS 13 per share, and at the time Ormat stock was trading at NIS 10. (Today it's NIS 55). The bond buyers knew that Ormat would gain more than 30 percent in seven years, and it's still trading at a discount.

And that is precisely what forced the Bronickis to float subsidiary Ormat Technologies in the United States, not the parent company, Ormat Industries. If they'd floated the parent, they'd have lost control completely.