Viewpoint / Seeking Koor's White Knight

Jonathan Kolber, who controls and runs the Koor (NYSE:KOR) conglomerate, has a problem, and he knows it.

His problems are nothing new. He should be familiar with the feeling of the ground trembling beneath his feet, and the fear of losing his family business. Well over a year ago Koor's debts to the banks mounted to life-threatening proportions, inducing Kolber to seek innovative solutions.

In June 2001 the business world learned that Kolber was considering bringing in Poalim Investments (since renamed Polar Investments) as a partner in Koor's controlling interest.

Kolber proposed to issue to Poalim, controlled by his neighbor in the Tel Aviv office building Millennium Tower, Itschak Shrem, $150 million worth of convertible notes. Exercise of the notes would have brought Shrem a key shareholding of 20 percent in Koor.

The deal fell through, though, possibly over opposition by Bank Hapoalim, which then held about 21 percent of Koor's shares. Instead, Hapoalim agreed to reschedule Koor's debts, which then totaled some $265 million.

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Hapoalim thus paved the path for the troubled conglomerate to reschedule its $120 million debt to Bank Leumi and the $80 million owed to First International Bank of Israel.

Yet Hapoalim, which rescued Koor back in mid-2001 and saved it from coerced partnership with Itschak Shrem, is the root of Kolber's migraines in 2003.

The story is dead simple. With its 20-percent interest, Hapoalim had been not only a creditor but also a key shareholder. It had an interest in Koor being managed in ways that would protect its equity.

But Hapoalim gave its shareholders all its shares in the conglomerate, as dividends in kind (meaning, non-cash). It isn't a shareholder and partner any more, let alone a key one. All it wants now is to protect the quality of Koor's debt.

After Hapoalim gave away its shares, Kolber finds himself with only 35 percent of Koor's shareholders equity, which ostensibly leaves the door wide open to a hostile takeover. And that could result in Kolber's ouster.

Rumors of exactly that scenario have been circulating in Israeli financial circles for weeks. Names mentioned include Benny Gaon, Yitzhak Tshuva, even Yossi Maiman. Turnover in Koor shares on the Tel Aviv Stock Exchange has been unusually high lately, and characterized by gains against the trend. But nobody has reported acquiring an interest of over 5 percent, which would require disclosure to the TASE authorities.

Kolber's dilemma

Kolber is in a trap. Koor isn't really a diversified conglomerate any more. It has four main assets, two of which are in good condition: Makhteshim Agan Industries and Elisra Electronic Systems, and two of which are in horrible condition: ECI Telecom (Nasdaq:ECIL) and Telrad Networks. If Koor's business continues to deteriorate, Kolber will find the conglomerate in violation of its covenants with the banks, which will then start riding him hard and intervening in his management.

On the other hand, if Kolber manages to improve Koor's condition, he is inviting hostile takeover attempts. It's a true dilemma.

Market sources see attempts driven mainly by foreign companies specializing in such buyouts. Despite the rumors, no locals probably have the means to take over a company like Koor at this stage, especially as it couldn't be done as a leveraged buyout, given how leveraged the concern is already. Nor would Israel's banks exactly leap on the opportunity to take part in such a deal.

Kolber's only out would seem to be find a new partner, a white knight willing to save the damsel with hefty infusions in exchange for a handsome private placement of shares. The result would be less debt for Koor, and more shares held by the controlling shareholders, which would put the nightmare of a hostile takeover to bed once and for all.

And that is apparently exactly what Kolber is up to these days. But he's operating carefully. Kolber is more afraid of an aggressive, ambitious partner than he is of a hostile takeover. The white knight might wind up lancing him and taking his seat.

We may expect Kolber's talks with investment groups to continue in the months to come. But Kolber will not only have to share his power: he will have to present the candidates with a working plan, including painful cutbacks at Koor's plush headquarters and offices.