The sale of the controlling stake in Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) by Ilan Ben Dov-controlled Scailex Corporation (TASE: SCIX; Pink Sheets:SCIXF) is underway. In a notice to the TASE after the market closed yesterday, Scailex announced that its "board of directors decided to appoint two of the world's largest investment banks - Deutsche Bank and Lazard Freres - to advise the company, canvass interest among potential buyers, and formulate a structure for a sale" of Partner.
The choice of Lazard Freres & Co. was apparently due to its expertise in the telecommunications industry. In January, it represented France Telecom SA (NYSE: FT; Euronext: FTE) in the sale of its stake in Orange Switzerland to Apax Partners for an estimated €1.6 billion.
Scailex added that Deutsche Bank confirmed that it would provide the potential buyer with a credit line of up to $1 billion if necessary, subject to due diligence and other conditions.
Scailex owns 44.5% of Partner. The holding is worth NIS 2.2 billion. Scailex's bondholders, which financed the bulk of the leveraged acquisition of Partner, have a lien on 27.9% of Partner as collateral.
In January, Scailex announced, "The company's board of directors decided to contract with an international investment bank to manage on its behalf the sale of a bloc of shares to a strategic partner, while retaining the controlling core, at a substantially higher price than Partner's current price on the market."
However, from yesterday's announcement it is not at all clear whether at the end of the sale process, which will probably take months, Scailex will keep control of Partner, or even have a stake in the mobile carrier at all.
Scailex gave a wide range of possible deals, meantioning, among other things, "the entry of major partner into Partner, including the possibility of turning Partner or Scailex into a private company." This suggests that the potential buyer may want to acquire 100% of Partner, including both Scailex and the public's stakes in the company, and that Scailex has left this option open.
Ben Dov acquired Partner through Scailex in late 2009 for NIS 4.66 billion. However, Partner's share price has fallen 60% since the beginning of 2011, giving Scailex a paper loss of NIS 900 million on the investment (including NIS 1.59 billion in dividends it has withdrawn from Partner). In 2010, Scailex made a paper profit of NIS 2 billion on the investment.
Bondholders will have to agree
If a buyer can be found for Scailex's shares in Partner - which are the collateral for Scailex's bonds - Scailex will have to reach a deal with the bondholders on the use of the sale proceeds. Given the blow to Ben Dov's reputation, partly due to his failure to reach a debt settlement for Tao Tsuot Ltd. (TASE: TAO-M), which he controls, Scailex's bondholders are liable to demand full repayment of the company's bond debt from the proceeds of a sale of Partner, or liens in their favor on other securities to replace the Partner shares sold.
Scailex's share price rose 7% on the TASE today to NIS 17.91, giving a market cap of NIS 500 million.Partner's share price rose 3.5% to NIS 31.85, and rose 3.8% in early trading on Nasdaq to $8.59, giving a market cap of $1.34 billion.
Prices for Scailex's bonds rose more moderately, and they are now traded at yields of 5.7-19.6%. The share price of Scailex's parent company Suny Electronics Ltd. (TASE: SUNY) rose 6.1% to NIS 11.66, giving a market cap of NIS 359 million, and prices for its bonds also rose, and they are traded at yields of 21-22%.
The sale of the controlling interest in Partner is intended to strengthen Scailex's capital structure. It is not clear right now how the company can repay its debts or distribute a dividend to Suny. Partner will be sold after Scailex dropped an earlier plan to sell part of its Samsung devices import business.
Regulatory changes, such as the slashing of inter-network connectivity fees, hit Partner's results hard in 2011, and prompted the extraordinary decision not to distribute a dividend for the second quarter. At the same time, investors have reacted to future changes in the competitive map in Israel's telecommunications market, including the entry of two new carriers, Mirs Communications Ltd. and Golan Telecom Ltd., as well as mobile virtual network operators (MVNOs), which means that Partner will no longer enjoy the profit margins of the past anytime soon. Some analysts give the company a "Sell" recommendation.
Partner has not yet published its full-year financial report for 2011. However, its revenue in January-September totaled NIS 5.4 billion, 10% more than for the corresponding period of 2010, thanks to the acquisition of its subsidiary 012 Smile Telecom Ltd. On the other hand, Partner's net profit fell 32.8% to NIS 631 million.
The sharp drop in services revenue in January-September was partly offset by strong smartphone sales, but these sales are expected to fall off in the future. Haim Romano took over as CEO from Yacov Gelbard in the fourth quarter of 2011.
Published by Globes [online], Israel business news - www.globes-online.com - on February 2, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012