What's going on with Eduardo Elsztain and Moti Ben-Moshe? A year has gone by since the court decided that control of IDB would pass to the two, and six months since that actually happened, and the capital market still doesn't know what to make of the new owners of one of Israel's largest holding companies.
The bare facts show that although the pair have so far invested the vast sum of NIS 1.4 billion in IDB, under the commitments they undertook in the company's debt arrangement, IDB has still not reached safe haven.
This week, Elsztain told the business press that "I have dreamt of making a substantial investment in Israel since I was 20 years old… buying a concern like IDB is something that can happen only once in a hundred years." Given the huge loss on paper that the investment in IDB has caused the two men so far some NIS 600 million - it seems pertinent to ask whether this is not another instance of someone being carried away by the dream of becoming a prominent businessman in Israel, and failing to see the risks associated with his investment.
Almost a year has gone by, and too many question marks hover over the "unnatural" tie between Elsztain and Ben-Moshe, over the ability of this pair to make strategic moves that will uncover value in the concern, and over their sources of finance and ability to continue injecting the considerable sums to which they are committed (some NIS 800 million in 2015-2016) at a price much higher than the market price.
Evidence of the doubts about the two men can be seen in the steep rise in IDB's bond yields two weeks ago to about 10%, while at the same time the company's share price tumbled, after the market's level of anxiety about IDB's ability to service its debt again rose.
Only after Elsztain and Ben-Moshe hurriedly announced that they would inject NIS 176 million by exercising their warrants on IDB shares, at a large premium over the market price, and subsidiary Discount Investment declared a NIS 200 million dividend, did IDB's securities recover.
This is happening while the concern's financial situation continues to be challenging, with solo debt amounting to NIS 4 billion at the end of the second quarter, a shareholders' equity deficit in the hundreds of millions of shekels, and an auditor's going concern qualification on its financial statements, all of which indicates that the possibility of the concern again finding itself in a position of struggling to pay its debts in the coming years is not just theoretical.
Not an ideal relationship
Control of IDB passed to Elsztain and Ben-Moshe in May this year, at the end of dramatic court proceedings after the biggest holding company in the Israeli economy collapsed into insolvency under its previous ownership, headed by Nochi Dankner.
As mentioned, in the six months since then, the two controlling shareholders have demonstrated admirable commitment to the terms of the debt arrangement, and have injected NIS 1.4 billion in order to restore the concern to health, an investment that gives Elsztain and Ben-Moshe 62% of IDB Development. Today, this stake is worth just NIS 800 million.
Some of the doubts that continue to surround IDB arise from the relationship between the controlling pair, which is far from ideal. Since they took the helm, Elsztain and Ben-Moshe have still not put into effect any strategic business decisions about the concern's main assets. Evidence of the lack of communication between the two is the fact that IDB and its main subsidiaries still continue to be managed by Nochi Dankner's people.
It should be remembered that the link between Elsztain, the financier from Argentina, and Ben-Moshe, the anonymous young businessman from Modi'in, came about by happenstance, after they each made a separate investment proposal at the pricing stage. "We're not in IDB together in order to love each other, but in order to enhance the investment," Elsztain told "Globes" this week. For all that, the assessment on the market is that the partnership between the two men will not last long, because of the different business cultures they each represent.
But it is not just the relationship between the controlling shareholders that weighs on IDB Development. Most of the companies it holds are far from their glory days, and it is doubtful whether they can yield the concern regular substantial dividends or whether selling them could release value further up the pyramid.
This applies particularly to wireless carrier Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and retail chain Shufersal Ltd. (TASE:SAE), formerly IDB's main cash cows, which in recent years have suffered from changes in market conditions and fierce competition.
Another of the main holdings, Clal Insurance, was nearly sold this year to a consortium of Chinese investors, in a deal involving a generous premium that would have put Elsztain and Ben-Moshe in a much more comfortable financial position.
It's likely that the two now regret it, but their opposition to the sale deal (which was signed in the Nochi Dankner era), certainly made it easier for the Ministry of Finance to decide not to approve the Chinese consortium at the end of May.
It's not clear what Elsztain and Ben-Moshe were thinking; they probably estimated that they would be able to obtain a better price in the future than the Chinese had agreed to pay (some NIS 1.5 billion for 32% of Clal Insurance). In fact, not only did the cancellation of the Clal sale deal force Elsztain and Ben-Moshe to inject about NIS 500 million into IDB (in accordance with the debt arrangement terms), but it is also liable to lead to a sale of shares in Clal Finance at a comparatively low price in the near future.
At present, the controlling holding in Clal Finance is in the hands of the trustee on behalf of the Ministry of Finance. The Ministry of Finance recently signaled that it would not approve Elsztain and Ben-Moshe as controlling shareholders in the insurance company. In order to sell control at a price above market, the two now have to find a buyer who will sign an agreement by the end of the year, otherwise the trustee is liable to sell the insurance company's shares via the stock market, without a premium, and perhaps even at a price lower than the current price.
It could be that in the long run, if they stay the course and benefit from a following wind from the markets, Elsztain and Ben-Moshe will yet pay back their investment in the concern, and possibly even see profits. For the time being, they are paying a high tuition fee for their lack of familiarity with the capital market and the convolutions of regulation in Israel, chiefly in the shape of the excessive amount that they undertook to invest in IDB under the debt arrangement.
Published by Globes [online], Israel business news - www.globes-online.com - on November 6, 2014
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