"Idan Ofer syphoned $1b from Zim" - report

Zim agreed to long-term ship leases at above market prices to companies owned by Idan Ofer says a new report.

In February 2008, Zim Integrated Shipping Services Ltd. made one of the worst deals in its history. Its 27-year lease on the Zim Marseilles expired and the company renewed it for three more years. Even though the ship was close to the end of its life, Zim agreed to a 70% increase in the lease from $9,750 a day to $16,900 a day.

A year later, Zim was forced to scrap the ship and compensate its owners for the premature termination of the lease. The compensation totaled no less than $8.5 million, on the basis of the inflated lease terms. Zim's bitter loss was the gain of the ship's owner XT Group Ltd. (formerly Ofer Holdings Ltd.) unit XT Shipping, controlled by Idan Ofer and his partner, Udi Angel - the same Idan Ofer who controls Zim through Israel Corporation (TASE: ILCO).

In the past few years, Zim has paid its controlling shareholders more than $1 billion in leasing fees, according to a report by Dr. Zeev Rotem commissioned by the Israel Maritime Officers Union that it sent to Knesset Finance Committee chairman MK Nissan Slomiansky (Habayit Hayehudi), Minister of Finance Yair Lapid, Minister of Defense Moshe Ya'alon, and Minister of Transport Yisrael Katz.

Following the investigative report by "Globes" in February, Rotem's report reveals that the Zim Marseilles deal was not a one-off occurrence: an analysis of ship leases by Zim from its parties at interest in recent years concludes that the company's controlling shareholders and affiliated parties caused the deterioration in Zim's financial condition while the private companies of these parties continued to thrive.

"The large number of long-term leases with the parties at interest and the differences in prices of leases that Zim committed to compared with market prices raise many question markets over the sharing of risk between the company (Zim) and the leasing companies," says Rotem. "These long-term agreements at relatively high prices, without any fair exit clauses to hedge the risk are one of the main reasons for the company's decline."

Rotem cites a valuation for Zim by pwc for Israel Corp., which states, "The company's current leases are higher than market prices."

Israel Corp. acquired 48.8% of Zim in 1970 and almost 100% when it acquired the state's stake in 2004. Zim was a healthy company in 2004, with no leverage and rising profits. The company's business results peaked in 2005, with an operating profit of $191 million. Its subsequent decline brought it to the verge of bankruptcy in 2006, and its cumulative net loss since then is $2 billion and its operating loss is $1.25 billion.

The main argument of Zim and its controlling shareholders is that its poor financials in recent years are not because of failed management or the milking of the company, but were solely due to the condition of the global shipping industry.

Rotem's report completely disproves this argument. He notes that, in the preceding decade, the company went on a shopping spree for new ships at an unprecedented and very irresponsible scale. It assumed more than $2 billion in commitments, more than any other shipping company, except for the world's two biggest firms - Denmark's AP Moller Maersk A/S (OMX: MAERSK-B) and China Ocean Shipping Company (Cosco). He concludes that Zim's huge investment in new ships, together with its bad leases signed with its controlling shareholders, were the reason for the company's sinking as much as trends in the global shipping market.

To prove his case, Rotem compared Zim with ten leading foreign shipping companies. He found that Zim is the only company that posted an operating loss in five of the past six years, and that its cumulative loss was larger in absolute terms, even though its activity was much smaller than most of the other companies in the sample. "The fact that Zim posted extraordinarily heavy losses compared with other shipping companies unequivocally shows that the argument that the company's financial decline is solely due to the 'condition in global shipping' is groundless," says Rotem. "It is obvious to everyone that the conduct of its management and owners has a major contribution to the company's condition and the fact that it presents the worst performance in the shipping industry in the past decade."

As for the state's golden share in Zim, Rotem says that this arrangement, which guaranteed Israel's interest in Zim, is a normal practice in the West, including in the US, "in view of the strategic importance of this industry."

As for the value of the golden share, which Zim is seeking to abolish without compensating the state, Rotem says, "The golden share has a price, which means that the company that requested, and obtained, a discount from the Israeli government for the golden share should at the very least offer to refund the government what it received. This unilateral practice by Israel Corp does not indicate clean hands in its conduct vis-a-vis the state."

Published by Globes [online], Israel business news - www.globes-online.com - on May 27, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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