The announcement by Hutchison Whampoa Ltd. (HKSE: 0013) that it was cancelling the acquisition of Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) controlling shareholder Scailex Corporation (TASE: SCIX; Pink Sheets:SCIXF) leaves the parties empty-handed.
Ilan Ben-Dov had hoped that the sale of Scailex to Hutchison would rescue him from his dilemma, and leave him his traditional business of importing Samsung mobile phones, which he would transfer from Scailex to its current controlling shareholder, Suny Electronics Ltd. (TASE: SUNY). Scailex's bondholders strongly opposed this deal as they would take a sharp reduction on the value of their holdings, while the man responsible would keep a profitable business.
One investment institution, which opposed the Hutchison deal, argued that it would create a bad precedent. "If this happens, no shareholder will agree to inject capital as part of a debt settlement," it said. The institutions' opposition to the deal may have earned them some brownie points on image, but the cancellation leaves them holding a NIS 1.6 billion debt, on which they will take a far bigger loss than one proposed by Hutchison.
Hutchison saw the public opprobrium it garnered from the deal, when instead of being depicted as the White Knight riding in to save Scailex's bondholders, it took fire from them over the complicated financial deal for saving Ben-Dov. Hutchison decided to minimize the damage and cancelled the deal, but this is probably not its last word.
Hutchison, like it or not, is still in the game, because of its $300 million (NIS 1.2 billion) seller's loan granted to Scailex when it acquired Partner in 2009 secured by a lien on 12% of Partner's shares, which are now worth just NIS 290 million. Hutchison, too, will likely suffer painful losses in the future.
Some of Scailex's bondholders are convinced that Hutchison's announcement is a tactical move in negotiations with them to persuade them to approve the deal. But while such a maneuver may be part of the repertoire of Israeli capital market players, it does not suit major league equity funds and companies like Hutchison and its chairman Li Ka-shing.
What will happen when the dust settles? An examination of Scailex's financial data suggests that it is ripe for a takeover. A potential buyer seeking to acquire control of its subsidiary, Orange franchisee Partner, will not have to bring fresh capital to a deal or secure financing, but will only have to assume Scailex's debts while giving its shareholders a major haircut. If Partner's business recovers, the buyer can record a high return merely for its willingness to assume the debt.
However, like Ben-Dov and Scailex's bondholders, the potential investor will know that what is ultimately important is the asset on which Scailex is based - an Israeli mobile carrier - an asset, which given the current regulation-heavy and competition-rich conditions of the Israeli telecommunications market, is worth less than in the past.
Published by Globes [online], Israel business news - www.globes-online.com - on August 21, 2012
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