Taking Stock / Is Tower a Good Investment?

Vernia quit in the dip. After just two years in the driver's seat of the roller coaster, Carmel Vernia decided semiconductors just weren't for him and announced his resignation as chairman of Tower Semiconductors, the company that launched one of Israel's most ambitious projects ever: a fab to make chips using 0.18 micron technology, and lower too.

Vernia's timing is particularly awful. The company raised half a billion dollars from the banks, $26 million from Israeli bondholders, and $650 million in grants from the state; strategic partners put in $350 million more, even though Tower lost $250 million in two years and failed to meet its own turnover projections; and at that point Vernia chose to demonstrate his lack of faith in the company and its chances of returning investments, and headed for the hills.

His resignation is a good point for some soul-searching, even if spasmodic, among the personalities involved in Tower. The banks that lent it money, though so many people claimed Tower had no advantage to offer versus the giants of the Far East. The government's Investments Center, which forked over a huge amount, based on business plans that might serve to wrap fish. And of course the man who initiated the whole elephantine investment: the chairman of The Israel Corporation, Idan Ofer.

Here's a thought. Should I invest in Tower? Really, all that is spilled milk. Let them navel-gaze all they please. Here's a more relevant question: Is Tower stock, which lost 70 percent of its value since its last offering a year back, a good investment opportunity or not?

We think not. To survive, the company will need more capital and the first to pay the price, in the form of massive dilution, will be the minority shareholders from among the general public.

Next in line will be the debt holders, and here's where the issue gets interesting.

Tower is a test case for a whole series of companies that are in tremendous financial difficulty, yet which are controlled by fabulously wealthy entities.

In recent years, the ethical code on the capital market has been deteriorating. Wealthy controlling shareholders have been shaking off debts by their group companies. The Recanatis ignored Tevel's woes and let it slide into bankruptcy. Yossi Maiman stopped funding Channel 10 and wrote off two-thirds of the creditors' money. The Landaus, who control Union Bank, let their company Hiram Gat enter a creditors' arrangement.

Yitzhak Tshuva, on the other hand, did the opposite, spending $50 million of his personal fortune to repay the Green venture capital fund's massive debt to Bank Leumi.

Idan Ofer is a lot richer than Yossi Maiman, and unlike the Recanatis, who shook off Tevel moments before selling IDB, he means to do a lot more business in Israel. His dilemma is therefore the harder one.

Tower is controlled by The Israel Corporation and its state of the art Fab 2 is associated with his name personally. Disowning it when the crunch comes will be tricky.

Idan Ofer has another problem: he's one of the people who own United Mizrahi Bank. As a banker, he'd hate to see a trend of shareholders shrugging off their companies' debts.

Could the controlling shareholder of an Israeli bank dishonor debts? Can that be in a country with barely five banks supplying 80 percent of the credit?

Not the first to reschedule

There is precedent, of course. Israel Salt Industries belongs to the Dankner family, but it hasn't repaid the loan it took from Bank Leumi to buy the controlling interest in Bank Hapoalim. What did Salt do instead? Negotiate with Leumi, which finally rescheduled the loan over 12 years.

Two weeks ago another Dankner family company, Dor Chemicals, admitted to the Tel Aviv Stock Exchange that it is in "frequent contact with investors and is discussing various matters on a constant basis."

Hm? What issues does it have with bondholders?

A look at Dor's balance sheet can be indicative of these issues. It owes the banks more than a billion shekels, arousing the suspicion that it may not be able to repay its bondholders in time. It sounds like Dor is preparing the groundwork for rescheduling its debt.

The Ofer family is not the Dankner family. The generational transition among the Dankners has been accompanied by a loss of wealth, while the Ofers just got richer and richer, from shipping, chemicals and real estate. If you're on the lookout for high-profile but interesting investments, we wouldn't recommend betting on Dor bonds. We'd suggest you go for Tower debt, as its bonds are paying a phenomenal 35 percent a year at this point. It is also a bond issued by a family that controls Mizrahi Bank and whose good name on the market is still worth a lot of money to it.