IDB Development, controlled by Eduardo Elsztain, yesterday reported that, before Rosh Hashanah, it signed a memorandum of principles for the sale of its Discount Investment Corporation (TASE: DISI) subsidiary to a new private company, also controlled by Elsztain, to be incorporated in Israel.
The purpose of the deal, first reported four months ago, is to enable the public companies controlled by Elsztain to comply with the requirements of the Promotion of Competition and Reduction of Concentration Law. This law limits the number of layers in a public company's ownership pyramid to three as of December 2017. IDB Development said that completion of the deal was subject to the signing of a final sale agreement by November 16, and the fulfillment of other conditions by December 10.
New company to buy Discount Investment shares
IDB Holding is a private company fully owned by Elsztain group companies, headed by Dolphin Holland. According to the memorandum of principles, Dolphin Holland will create a new Israeli company that will buy all of IDB Holding's shares in Discount Investment for NIS 1.77 billion, reflecting a company value of NIS 2.5 billion.
The deal will be at NIS 16.60 per Discount Investment share, reflecting a 22.5% premium on last week's price on the Tel Aviv Stock Exchange (TASE). At the same time, the value of Discount Investment in the deal is 3% lower than its NIS 2.58 billion net asset value (NAV) as of the end of June (according to the reports for the second quarter of 2017).
Nevertheless, the proceeds set in negotiations between Elsztain's representatives and the independent IDB Holding directors are only on paper, because no payment will be made for the transfer of the shares on the date on which the deal is completed. According to the planned deal, the acquiring company will issue a bond to IDB Holding for the full consideration, with repayment in a single payment in December 2022, with an option for extension to December 2025.
The bond will bear 5.5% annual interest to be paid by the acquiring company using the dividends that it expects to receive from Discount Investment during the period.
Shares encumbered until loan repaid
The shares being sold will be encumbered in favor of IDB Holding during the life of the loan. Elsztain Group will also attach in IDB Holding's favor 9.64 million more shares in Discount Investment (6.4% of the latter's capital) with a value of NIS 130 million currently held directly by Dolphin Holland.
Senior IDB Holding sources said that this by itself would further improve the situation of the company's bondholders, who are owed NIS 3.95 billion.
The current deal is only the first stage in the process of flattening the pyramid of public companies controlled by Elsztain. In the second stage, the Promotion of Competition and Reduction of Concentration Law limits the number of layers in the pyramid to two as of November 2019.
Here Discount Investment's management will have trouble finding a creative solution, as it did in the first stage. In the second stage, it will have to choose between three main alternatives: a complete merger of Property and Building Ltd. (TASE: PTBL) into Discount Investment, a complete merger of sub-subsidiary Bayside Land Corp. Ltd.(Gav Yam) (TASE: BYSD1) into subsidiary Property & Building, or ceding control of Bayside and taking steps to sell it.
Published by Globes [online], Israel Business News - www.globes-online.com - on September 25, 2017
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