Tefron Looking for a White Knight

Textile manufacturer Tefron confirmed last Thursday that it was operating at the mercy of the banks, who said they had given it three weeks to come up with a new business plan for 2010 that was acceptable to them..

The company has lost $30 million since the beginning of 2008 through September 2009, and forecasts a $12 million loss for next year.

The company said that if the banks - Leumi, Hapoalim and Israel Discount - do not approve the new plan, they will cancel its $29 million credit line and close the company down.

Tefron's story might seem like just another case of a successful Israeli firm that could not keep up with cheaper competitors in places like China, India and Vietnam.

But a look at the company's financial reports for the past five years tells a different story - a problematic combination of private equity funds, which are focused on short-term profits, with traditional industrial firms.

Tefron's controlling owner is Norfat, an equal partnership between Ishay Davidi's FIMI fund and Meir Shamir's Mivtach Shamir. Norfat owns 20.8% of Tefron's shares.

Tefron made a profit of $26 million in 2006, and had positive cash flow of $27 million that year, on revenues of $188 million. It also exported 77% to 90% of its products to North America, and the drop in the dollar hit it hard. But the company - and its owners - took no steps to reduce its reliance on dollar exports, such as by increasing European sales, or by reducing costs by farming out production to lower-cost countries. Norfat has returned nearly its entire investment through share sales, management fees and a total of $18 million in dividends.

Moreover, even though Tefron had first-class customers such as Nike and Victoria's Secret - its two largest customers - it seems to have let its technology, quality and customer service deteriorate. It missed deadlines and had to pay fines as price competition increased.

The Finance Ministry is examining ways of aiding Tefron and its 1,000 employees. The state does not intend to directly support the company, but only to set up a mechanism to support all troubled businesses based on clear, equal criteria. No such mechanism currently exists.

In addition, if the state does provide some form of assistance, it will be conditional on the banks and Tefron's owners making contributions of their own.

The state has not provided direct support for troubled manufacturers since 2004. Over the past three years, three large factories in the periphery have gone under: Polgat, Vita Pri Galil and Off Haemek. None received state aid, despite heavy pressure.

The state lacks an orderly legal mechanism for providing such support, based on transparent criteria.

Tefron has also stopped paying rent on its factory to REIT-1, which told the stock exchange yesterday that Tefron had not paid its $219,000 rent for December. REIT-1 said Tefron had asked to renegotiate its rental agreement. REIT-1 said it has $500,000 in bank guarantees from Tefron.