Israel Corp. CEO earns huge salary on failed investments

Ron Steinblatt

Nir Gilad has earned NIS 83 million, while the company has seen one failed investment after another.

On Sunday, after years of huge losses and a reverberating marketing failure, electric car venture Better Place Inc., controlled by Israel Corporation (TASE: ILCO), filed for liquidation. Israel Corp, which owns 28.6% of Better Place, lost its $293 million investment in the company.

Israel Corp.'s share price rose 4.4% on Sunday, and was unchanged yesterday. The jump in the share price on the day it wrote off one of Israel Corp.'s biggest investments, sends a clear message: the market welcomed the announcement that it will not invest any more in the ambitious electric car venture.

Better Place's liquidation is just one of the unsuccessful investments, to put it mildly by Israel Corp. in the past few years, under controlling shareholder and former chairman Idan Ofer and, since 2007, CEO Nir Gilad, a former Ministry of Finance accountant general.

Israel Corp.'s investments include the following:

  1. A paper loss of NIS 850 million on its acquisition of Oil Refineries Ltd. (TASE:ORL) from the state in 2007;
  2. The acquisition of Zim Integrated Shipping Services Ltd. from the state. Several years ago, Gilad approved an ambitious expansion program for Zim, which, two years later, resulted in a debt settlement and a capital injection into it by Israel Corp. of over NIS 2 billion;
  3. Specialty foundry Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM), on which Israel Corp. regularly wastes its time and money.

At the same time, Israel Corp. has developed private power generation, through IC Power Ltd., mostly through the acquisition of power stations in Latin America for more than $500 million. This business has been developing nicely in recent years. Israel Corp. has also invested $368 million in car-making, through its Chinese joint venture Qoros Auto Company, whose fate will become clear next year.

Israel Corp.'s investments under Gilad's helm have cost it billions of shekels in recent years, on top of which has to be added the financing expenses on the debt assumed to make them. In the past six years, Israel Corp.'s share price has had a negative return of 21%, while the Tel Aviv 25 Index has had a positive return of 10% over the same period.

In view of the disappointing figures, it is hard to avoid the thought that had Gilad made no investment decision, and simply milked Israel Corp.'s cash cow, Israel Chemicals Ltd. (TASE: ICL), its share price would correlate with the performance of the latter, whose share price has risen 64% in the past six years.

Further review of Israel Corp.'s investment shows that the global economic situation was not the only factor adversely affecting the company's results. All the investments made under Gilad are linked to energy in one way or another, except that instead of generating synergy, there is a reverse correlation.

The concept of Better Place took shape when the price of oil skyrocketed to an all-time high. It could be expected a correlation between rising oil prices and the worthwhileness of the venture to sell electric cars as an alternative to gasoline-powered cars. But, Oil Refineries produces these fuels, and had prices stayed high over time, consumption would presumably have fallen, which would affect Oil Refineries' refining margins and profits. More importantly, Zim, a big fuel consumer, and rising oil prices boost its expenses and drag it to heavy losses. Conversely, Israel Chemicals should benefit from higher oil prices, because they send commodities prices upward, along with the prices for the company's fertilizers.

If Israel Corp.'s executives were asked which they prefer: high oil prices or low prices, they would probably scratch their heads in view of the contradictory effect the price of oil has on Israel Corp.'s subsidiaries. It is doubtful whether Israel Corp. has a balance sheet showing its exposure and linkage to the price of oil, or a balancing system to neutralize this exposure.

How did Israel Corp. end up in this shape? The problem apparently begins with its very large cash reserves thanks to Israel Chemicals' thriving business on one hand, and an ambitious CEO who wants to justify his huge salary cost of NIS 83 million in 2007-12 on the other. The result is a company which has made huge high-risk investment which, would probably not have been made had the company had less cash.

Published by Globes [online], Israel business news - www.globes-online.com - on May 28, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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