The completion of splitting off some of Israel Corporation's (TASE: ILCO) assets into a company named Kenon is expected to cause an increase in the equity of Bank Leumi (TASE: LUMI), which owns 18% of Israel Corporation. It is also believed that Bank Leumi has no interest in investing in Kenon, and is likely to sell its shares, probably next year, which could earn the bank considerable profits.
In the next two weeks, Israel Corporation is slated to finish the spinoff process, and to register Kenon for trading on a US stock exchange. Kenon will be assigned Israel Corporation's holdings in Zim Integrated Shipping Services Ltd., IC Power, and Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM). Simultaneously with being listed for trading, Kenon will distribute a dividend in kind to Israel Corporation's shareholders, headed by Idan Ofer (43%) and Bank Leumi (TASE: LUMI) (18%). This measure is likely to affect the way Bank Leumi reports its investment in Israel Corporation in its balance sheet, and to increase the bank's equity. At the same time, no capital gain on the sale is anticipated. Such a profit will be posted only if it occurs when the bank begins to sell its shares. Israel Corporation is currently valued in Bank Leumi's financial statements at the bank's share of its equity. The holdings are valued at NIS 1.45 billion, while its NIS 2.7 billion market value is almost double that.
On the other hand, Kenon will be defined as an asset available for sale (which hints at Bank Leumi's intentions with respect to this investment), and it will therefore be revalued at its market price. A reasonable assumption is that Kenon's market value will be higher than its current value in the Israel Corporation. In such a situation, Bank Leumi's equity will rise, thereby improving its capital adequacy ratio.
The size of the increase in the bank's equity is not clear; it depends on Kenon's market value, but it can be assumed that this will be a considerable amount, given the fact that the current market value of Israel Corporation is double its value in Bank Leumi's balance sheet.
Prediction: The holdings in Kenon will be sold first
Bank Leumi is likely to sell at least 9% of Israel Corporation and Kenon's shares in the next five years as part of the conclusions of the committee on over-concentration, which bars a major financial entity from owning a major non-financial entity.
It is believed that Bank Leumi will first sell its holdings in Kenon, where the bank has no commitment, such as the appointment of directors, in contrast to its involvement in Israel Corporation. The holdings in Israel Corporation will also be sold, and a reasonable assumption is that this will occur before the end of the five years remaining to the bank.
Kenon Holdings, registered in Singapore, has filed a prospectus for listing of its shares for trading in the US, but without raising capital. The company is also expected to be listed on the Tel Aviv Stock Exchange (TASE).
As of now, Kenon is a fully owned subsidiary of the Israel Corporation. The latter's stakes in Zim (32%), AC Power (100%), Tower Semiconductor (30%), Chinese automaker Qoros (50%), and IC Green Energy (100%).
Kenon has told investors that the book value of all the subsidiaries amounts to $1.2 billion, with more than half of this amount being attributed to IC Power. The holdings in Qoros are listed in Kenon's books at $272 million and the 32% stake in Zim is listed in the books at only $8 million, while the latter's current market value is nearly $230 million.
The Israel Corporation announced today that it was granting Qoros a $57 million owners' loan. This loan made it possible to release Israel Corporation from its $300 million loan guarantee to Qoros. In the first quarter of 2015, Israel Corporation is expected to grant Qoros a further $70 million loan that will release it from all the guarantees it provided to Qoros, which is suffering heavy losses.
Published by Globes [online], Israel business news - www.globes-online.com - on December 18, 2014
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