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Nochi Dankner's power play
[May 10, 2007]

Nochi Dankner's power play


(Israel Business Arena Via Thomson Dialog NewsEdge) Four years ago, Nochi Dankner was merely another scion of the many-branched Dankner family, part of the Israeli economy's aristocracy. The head of the family was Nochi's uncle, Shmuel Dankner, did not have great expectations of his nephew, to put it mildly. This was all the impetus that Nochi Dankner needed, and he and his father Yitzhak Dankner sold their stake in the family holding company for $90 million and started out on their own, far away from the quarrels, emotions, and disputes that have dogged the Dankner family to this day. All Nochi had to do was to prove to everyone that he could go it alone, that he no longer needed the family's backing, and that his ambition would make waves in the Israeli economy.

Four years ago, in May 2003, Dankner's marked his own personal independence day. He became the controlling shareholder in IDB Holding Corp. Ltd. (TASE:IDBH) and one of the strongest people in the Israeli economy. IDB, through its three subsidiaries, Discount Investment Corporation (TASE: DISI), IDB Development Corp. Ltd. (TASE: IDBD), and Clal Industries and Investments Ltd. (TASE: CII), presides over some of the key companies in the economy, among them Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), Clal Finance Batucha Ltd. (TASE:CLFN), Super-Sol Ltd. (TASE:SAE;Pink Sheets:SSLTF.PK), Koor Industries Ltd. (NYSE: KOR; TASE: KOR), Makhteshim Agan Industries Ltd. (TASE: MAIN), Nesher Israel Cement Enterprises Ltd., Cellcom Israel Ltd. (NYSE:CEL), American Israeli Paper Mills Ltd. (AMEX: AIP; TASE: AIP), and many more. Dankner's companies can be found at virtually every junction in the business world. In other words, very few people in the business sector have the power and influence that he has. Dankner wanted this more than anything else, more than the financial profit he gained from IDB, even if he himself would claim otherwise.

A rough ride to independence


But it was no simple road to the summit of Israel's business world. During June 2001, Kardan NV (TASE: KRNV;AEX:KARD), controlled by Yosef Grunfeld and Avner Schur, attempted to acquire the controlling stake in IDB. The price tag was $1.3 billion, 50% higher than the group's market cap at that time. The Recanati family wanted to sell and Kardan wanted to buy, but the deal fell through. The price of IDB's shares on the Tel Aviv Stock Exchange (TASE) plummeted to $700 million. Kardan wanted to adjust the price accordingly but the Recanati family would have none of it, and the deal collapsed, as a result, among other things, of internal disagreements between the Recanatis themselves over IDB's future.

Spotting the business opportunity, Dankner put together a controlling core with the participation of the Livnat and Manor families, and in April 2002 he made an offer to the Recanatis for the controlling interest in IDB at a value of NIS 1.05 billion. The Israeli economy was in the throes of a deep recession then, and IDB's shares were continuing to tumble, and by the end of October the company was worth just $600 million. Dankner realized that this was an opportunity to make a better bargain and quote a lower price.

One year later, the IDB deal was signed and control of the group passed to Dankner and the Livnat and Maor families at a value of $840 million. Bank Leumi (TASE: LUMI) and Mivtachim provided $223 million in financing for the deal, with the acquirers paying the balance, $211 million, from their own equity. Of this sum, $165 million was paid on the closure of the deal, and $46 million in installments ($6.5 million of which shortly after the signing of the deal) over a four-year period, which is ending now.

But the signing of the amended deal was still not the end of the story. As the date for the closure of the deal, the end of March 2003, approached, Dankner asked for the price to be lowered again, against the backdrop of the difficulty in closing a financing agreement. He asked the sellers to set the value of the deal for IDB at $700-750 million, a request which they discussed in meetings held during April, and then turned down. They did consent, however, to lower the immediate payment (by $40 million, 10% of the deal to be paid in postdated installments). Having already been postponed until the end of April, the deal closure was postponed by a further three weeks, with the agreement finally signed in May 2003.

A 309% return on equity within four years

Looking back over four years, how much is Nochi Dankner's independence worth? It depends what factors what you take into account. We will focus on Dankner's share in the dividends distributed by IDB as the main source of his wealth, together with the shares he holds in the concern. Dankner's own dividends add up to no less than NIS 520 million over the last four years. But during this time, he increased his holdings in Ganden by 50% on average, and as these are private companies, how much Dankner paid for these additional holdings remains unknown.

Therefore, an examination of Dankner's personal unlocked value on the basis of his real holdings should be based on value of his preliminary holdings on acquiring IDB, which stood at 13.2%. Overall, IDB has distributed NIS 2.533 billion in dividends in the last four years, so Dankner's share of these comes to NIS 334 million. To this one must add the value of his holdings - again taking as basis his initial share in the deal (13.2%) - which are worth NIS 628 million. The total value of Dankner's holdings, according to this calculation, amounts to NIS 962 million. A total of $211 million in shareholder's equity was invested in the IDB deal (NIS 920 million based on the shekel-dollar rate at the time), and Dankner's share of the equity investment was NIS 235 million. In other words, he has generated a 309% return on his own equity investment in four years.

But Dankner is not the only one who benefited from the flow of dividends from IDB. His sister, Shelly Bergman, received NIS 315 million over the last four years, while the Livnat and Maor families received dividends worth NIS 270 million each during the same period. IDB deputy chairman Avi Fischer, Dankner's right hand man, who held 7-9% of Ganden during this period, received a payout of around NIS 90 million, while Discount Investment board member Rafi Bisker, who owned 1-3% of Ganden directly and indirectly, enjoyed dividends worth an estimated NIS 25 million.

These profits were made possible thanks to a number of key moves that Dankner initiated. As soon as the acquisition of the controlling interest in the dormant concern was complete, he sprang into action. He raised billions of shekels on the capital market, sold off assets and acquired companies. All these moves brought IDB to its current value of $1.16 billion. On the way, it distributed a total of $625 million in dividends, so overall the IDB group generated $950 million in value for investors. All this looks good, but if we look at the value generated by the company in percentage terms and compare this with an investment in the Tel Aviv 25 Index during the same period, the picture does not look that bright. An investment in IDB during those four years would have generated a 113% return for investors. The Tel Aviv 25 Index, on the other hand, recorded a return of 164% in the same period.

But Dankner sees IDB as much more than a financial investment. He considers it a lifetime project and a source of influence and power in order to gain even more power, as can be seen by the string of sell-offs and acquisitions that he has made since gaining control of the concern.

The key sell offs - Scitex and Azorim

Over the last four years, Dankner has offloaded most of the minority holdings that he had in large companies, such as those in Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) and Ormat Industries Ltd. (TASE: ORMT), as well as shares in small companies (such as the sale of the controlling stake in Polgat Ltd. (TASE:PLGT) to Zvi Barinboim). But one of Dankner's first big sell-offs was the sale of the group's holdings in Scitex which later changed its name to a target=new href=http://www.scailex.com/>Scailex Corp. ltd. (TASE: SCIX; Bulletin Board:SCIXF.OB).

Dankner sold the holdings in Scitex in stages. As soon as he took over the reigns at IDB, the group sold Scitex's holdings in Creo (in August 2003) - which it received following the merger of Scitex's pre-print division with Creo at the beginning of 2000 - for $133 million, a quarter of the value of the holding following the completion of the merger. As the end of 2003 approached, rumors circulated about the sale of the company's subsidiary Scitex Digital Printing (SDP), the developer of digital printers.

Although the then Scitex CEO Nahum Shani denied it, it turned out that there was no smoke without fire. Around one month later, in December 2003, Scitex signed an agreement for the sale of its subsidiary to printing giant Eastman Kodak Co. (NYSE: EK) for $262 million in cash ($250 million plus SDP's remaining cash). What is interesting about all this, is that a decade earlier the situation was the other way round - Kodak was the seller while Scitex was the buyer, although on that occasion, the check handed by Scitex to Kodak was for the far more modest sum of $70 million.

With the sale of SDP complete, Dankner turned his attention to the possible options for selling off the remaining significant holding, Scitex Vision. The alternatives were either a flotation of Scitex Vision on Nasdaq, or selling it to a giant in the same field. IDB eventually opted for the second of the two and in August 2005, it sold the company to Hewlett Packard Co. (NYSE:HPQ) for $230 million. Under the agreement with HP, Dankner also sold the rights to the name Scitex, following which the company was renamed Scailex.

The two big sell-offs left Scailex a market shell that had two assets - a whopping $250 million in cash and a tax asset in the form of $466 million in accumulated losses. Dankner considered using Scailex to take over Koor Industries Ltd. (NYSE: KOR; TASE: KOR), but ultimately decided to dispose of it permanently. In May 2006, IDB (through Discount Investments and Clal) sold the market shell to Israel Petrochemical Enterprises Ltd. (TASE:PTCH) for $165 million, at a value for Petrochemical Enterprises of $334 million. Petrochemical Enterprises subsequently used the platform it acquired from IDB in order to join forces with the Ofer family's Israel Corp. (TASE: ILCO) in their successful takeover of Oil Refineries Ltd. (TASE:ORL).

Azorim out, overseas real estate companies in

Another of Dankner's significant sell-offs began to take shape as early as July 2005, with the decision to put real estate company Azorim Investment, Development and Construction Ltd. (TASE: AZRM) up for sale. It is unclear to this day who brokered the Azorim deal, as the brokers involved have been squabbling ever since (Nathan Tzibin and Adv. Doron Cohen recently demanded NIS 30 million in brokerage fees from Azorim's new controlling shareholder, US real estate developer Boymelgreen Capital Ltd. (TASE:BMGN), but the deal ultimately went through.

On September 5, 2006, IDB completed the sale of its 63.8% stake in Azorim to real estate developer Shaya Boymelgreen for NIS 1.2 billion, at a company value of NIS 1.88 billion. The value of the deal, under the original agreement, was NIS 1.4 billion, but since then NIS 200 million has been distributed in dividends. The deal yielded a handsome NIS 300 million capital gain for IDB, and although only year has passed since it was signed it looks as though Dankner made a good deal here: Azorim is currently valued at NIS 1.7 billion only, despite the fact that the TA Real Estate 15 Index has recorded a 42% rise in the last twelve months and 19% since the beginning of 2007. Dankner also tried, parallel to the sale of Azorim, to put together a mega real estate deal overseas, and even contemplated acquiring a real estate company in Europe in a massive $2.5 billion deal, which never got off the ground. Nochi is still looking.

The main acquisitions: Cellcom and Koor

In June 2005, just as negotiations between IDB and the Safra Group reached a dramatic climax, "Globes" featured a report entitled "Nochi Dankner's round in Cellcom Israel Ltd. (NYSE:CEL)." The report dealt primarily with the fact that the acquisition by Discount Investment of BellSouth and Safra's stakes in Cellcom, a move that would give the former a 94.5% in the cellular company, created an excellent financial move for Dankner. The report looked at the dividends that the company would distribute once it had completed its takeover of Cellcom, floated it, and even sold parts of it to other parties at a profit on the purchase price.

Dankner did not disappoint, and he went on to carry out a chain of impressive financial moves with Cellcom. The financial moves that IDB carried out in Cellcom were very complex, starting from the raising of NIS 1.75 billion in bonds, through to the securing of a $550 million credit line from Citibank, the taking of a loan in excess of $600 million from Bank Leumi (TASE: LUMI) to finance the acquisition, and the distribution of a whopping NIS 3.8 billion dividend.

At the same time, Discount Investment sold 16% of Cellcom to financial investors: 5% to Bank Leumi, 5% to Goldman Sachs Group Inc. (NYSE: GS) (which has since lowered its stake to 4%), 4% to Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL), and a further 2% to First International Bank of Israel (TASE: FTIN1;FTIN5). All the partners paid Discount Investment for their stakes at a company value of $2.07 billion, excluding the dividends that were distributed and which they didn't benefit from. Therefore, the value for Cellcom reflected by these deals was $1.44 billion.

But ultimately, the success of the financial move in Cellcom was determined by its successful IPO, which was held at a value of $20 a share, giving the company a market cap of $2 billion.

When Dankner took over Discount Investment, it owned just 25% of Cellcom, with an influence that was marginal and an inability to push through important decisions, such as distributing dividends, on the company board. He decided to change all this and paid the company's previous partners, BellSouth and the Safra family, a total of $1.345 billion for their stakes in the company, thereby increasing his holding in Cellcom to 94.5%.

Dankner's new partners agreed to pay for the shares in Cellcom at the value that he paid the Safra family for them, which was higher than the value in the deal with BellSouth, even though they were not paying a control premium in Cellcom, something that made the success of Dankner's move all the more impressive.

Ultimately, the flotation produced an additional $353 million net for Discount Investment, and a net profit of no less than NIS 660 million. The sole criticism that the capital market had about the flotation was that Dankner did not leave a sufficient margin in the stock price to ensure it gained. The stock price did fall considerably in the period following the IPO, although it has since rallied and is now back up to $21.

Dankner snatches Koor from Tshuva's grasp

In May 2006, Dankner took another step in the drive to expand his empire, and snatched Koor Industries Ltd. (NYSE: KOR; TASE: KOR) right out of the hands of Yitzhak Tshuva, who had been mounting a bid of his own. Dankner made an offer that was just $50 million higher than Tshuva's. Tshuva may perhaps have been hurt by Dankner's move, but Dankner was the one who finally clinched a deal, acquiring Koor at a value of $1.25 billion.

Dankner apparently set his sights on Koor after he acquired 10% of it a few months earlier, so the weighted value of his acquisition of the company stood at $1.2 billion. Koor's current value, almost one year after the completion of the deal, is $1.02 billion, 15% lower than its acquisition price.

What, actually, was Dankner looking for in Koor? Overseas activity more than anything else. Makhteshim Agan Industries Ltd. (TASE: MAIN) is a global company and most of its markets are outside of Israel. This was just what Dankner was short of in the group, and as soon as he acquired Koor he declared that Makhteshim was the only company that interested him out of Koor's portfolio, and that he intended to offload the other holdings such as those in ECI Telecom Ltd. (Nasdaq: ECIL), Telrad Networks Ltd., the Sheraton Moriah Hotel chain, and the minority holding in Elbit Systems. Dankner's intentions were put into effect a few months later with the sale of Koor's holding in Elbit Systems, followed by that in the Sheraton Moriah hotel chain.

Published by Globes [online], Israel business news - www.globes.co.il - on May 10, 2007

Copyright of Globes Publisher Itonut (1983) Ltd. 2007

Copyright 2007 Globes. Source : Financial Times Information Limited.

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