Many businessmen like to tell "Globes" how hard it is to do business in Israel. The most frequent problem cited is the country's bureaucracy. Businessmen claim that every deal with reasonable business potential is stuck on some government clerk's desk. Sometimes the regulator is to blame, sometimes it's the Government Companies Authority, and sometimes it's the Ministry of Finance. Ofer Brothers has also complained more than once to "Globes" about Israel's bureaucracy that has kept the company in government chains. Ofer Brothers is a partner with the government in Oil Refineries, and was a partner in Zim Israel Navigation Co. until a few days ago. More than once, Ofer Brothers has publicly complained that it was fed up with its government partnership.
The Zim deal underscores what we've long known; deals with state are usually the best and most profitable. All those complaints by the country's top businessmen that Israel's bureaucracy is bad for business are so much balderdash, especially when the deals are measured in terms of results and numbers.
The smorgasbord of proposals Adv. Ram Caspi made during the negotiations with the Government Companies Authority, as uncovered by "Globes", rather embarrassed Israel Corp. (TASE:ILCO) executives, and some of them reportedly want to disassociate themselves from him, but it would be hard to imagine that the executives are embarrassed by the price Caspi struck for Zim. The man who ought to be embarrassed is Government Companies Authority director Eyal Gabbai who allowed Caspi to manipulate him, as only Caspi can. Caspi may have mixed up the numbers, but the important fact is that the numbers were low-balled in any case. In other words, Caspi's method drew fire, but that's not the main thing.
The main thing is the price tag: the state sold its holding in Zim to Ofer Brothers for nothing. And, as long as we're talking about Caspi, the question begs: why was Gabbai, a novice negotiator, permitted to deal with Caspi, who is eligible for an Oscar for his negotiating performances? Why didn’t the Government Companies Authority hire the good services of a foreign investment banker to support Gabbai? An investment banker would certainly have proposed a compensation mechanism in the event of a future IPO.
In any event, however we look at it, Israel Corp. made a great deal, financially speaking, and the numbers that will emerge later on will confirm this more than anything else. The question is now being asked, why did the Government Companies Authority decide to sell Zim at this price? "Globes" asked them yesterday for the valuation it commissioned for Zim from Avi Toledano CPA and economist Avi Hefetz, in order to study the numbers.
The Government Companies Authority replied, "The Government Companies Authority's strategy has never been to disclose the valuations for government companies it has commissioned, so that private parties will be unable to use the differences between the valuation for the original deal as arguments for future deals in subsequent privatizations."
True, private investors were not standing in line to buy Zim, and it's true that privatization is more important that a few hundred million shekels the government might have earned from the sale of Zim. But, even if this argument is taken into account, that is no justification for the Government Companies Authority concealing the valuation it received for Zim.
To the contrary, information the Government Companies Authority uses in taking decisions for the sale of companies such as Zim should be in the public domain. It is the public, after all, that owns the company, and it ought to be an active participant in the question of its sale. This is not a case of a private company whose figures are confidential, but a company whose financial data are more or less open.
The Government Companies Authority's argument that the disclosure of valuations might harm its "negotiating strategy" can be disproved, since it's obvious to everyone that businessmen cannot learn about the Government Companies Authority's flexibility in future deals from the difference between the valuation for Zim and the final price for the deal. Each privatization is a separate case, and is a function of its business and of supply and demand.
Another argument the Government Companies Authority made in favor of the sale price was that the contractual arrangements between the state and Ofer Brothers tied the state's hands. Under the agreement between the state and Israel Corp., the company had first refusal rights on any sale of the state's stake to potential investors. Put simply, in the event that the state decided to sell its Zim holding to a third party, Israel Corp. could match the offer. Alternatively, Israel Corp. had an option to sell its holding in Zim as well.
Israel Corp. had a bargaining chip that deterred potential investors, since any such investor risked $500 million to acquire control of Zim. On the other hand, it's not clear who held whom by the throat. Israel Corp. had long wanted to rid itself of its government partner in Zim, and as any negotiator knows, when the patience of one party wanes, the bargaining power of the other waxes.
It's hard to assess now what would have happened if the Government Companies Authority had played for time, since the sale process lasted for two years, but the time element unquestionably favored the Government Companies Authority rather than Israel Corp. in the negotiations. The Government Companies Authority did not know how to exploit its advantage properly, while Israel Corp. knew how to manipulate the Government Companies Authority during the negotiations. Shortly before the deal was closed, Israel Corp., playing hard to get, leaked to the press that had no interest in Zim. The ploy apparently worked on Gabbai and his team, who hastened to close the deal with Ofer Brothers.
In the end, Zim was sold to Israel Corp. at a company value of $236 million. I reiterate for who have not yet internalized the fact: Zim was sold to Israel Corp. at a company value of $236 million, or about NIS 1 billion at the prevailing exchange rate. Israel Corp., which owned 49.5% of Zim before the transaction, will buy the holding of the state and other shareholders for only NIS 530 million.
Zim's reported a net profit of NIS 128 million in January-September 2003. Although the company has not yet published its fourth quarter results, a cautious estimate of Zim's profit for 2003 as a whole is at least NIS 180-200 million. Add to this the widespread assessment that the global shipping industry is facing two especially profitable years, and one can conclude that Israel Corp. will make a return on investment in Zim within two years, assuming that most of its profit is distributed as dividends. If the optimistic projections about growth in global shipping are realized, there might even be some leftovers for Ofer Brothers.
It is always possible to claim that Zim's profit in 2003 was the exception, since it lost NIS 40 million in 2002, but if the company's profits from previous years are checked, they will show that Zim posted a net profit of NIS 59.7 million in 2001, NIS 140.4 million in 2000, and $25 million in 1999 (amounting to NIS 103 million at the prevailing exchange rate). Zim lost $4.9 million (amounting to NIS 20 million at the prevailing exchange rate) in 1998 and $38.8 million (amounting to NIS 160 million at the prevailing exchange rate) in 1997. Zim's average annual net profit for these seven years was NIS 44 million.
An average annual net profit of NIS44 million on an investment of NIS1 billion, amounts to a return of over 4.4% for seven years. On the other hand, if the return is examed over a five-year period, the average profit is NIS 93 million, or a 9.3% return on the investment.
This is unquestionably an excellent investment for Ofer Brothers. Even if the investment is measured in terms of current cash flow, since Zim's assets depreciate in value, it is still marvelous. Zim's average annual cash flow in the past seven years was NIS 380 million. In other words, Zim is a steady cash cow, a shareholder's fantasy.
What about Zim's balance sheet? Zim's short-term bank debt is NIS 875.1 million, including short-term loans and current costs on long-term loans. Against these liabilities, Zim has NIS 549.3 million in cash and cash equivalents. Zim's long-term debts to the banks and other financial institutions total NIS 2.3 billion. Zim's total liabilities, including its excess financial liabilities over financial assets, are NIS 2.6 billion.
This is not a small number, but it should be borne in mind that Zim has NIS 3.6 billion in net fixed assets (its ships), and a fixed and steady cash flow, which means that its financial debt is not a real hazard. Zim's equity, after a NIS 128 million increase in the past three years, plus its NIS 538 million surplus available for distribution, gives Ofer Brothers an excellent starting point for full ownership of Zim.
Published by Globes [online] - www.globes.co.il - on January 19, 2004