Israeli cyberattack company NSO Group has a long list of woes: being on the US Department of Commerce blacklist, lawsuits against it from Apple and Meta, a series of journalistic investigations again and again exposing the problematic use of its technology by its customers. But its internal problems are perhaps a more immediate threat to its survival.
Documents filed in recent months in the Tel Aviv District Court shed light on the shaky relationships between the three parties that ought to be working together for the benefit of the company's success: BRG, the consultancy company that is the controlling shareholder; the company's management led by cofounder and CEO Shalev Hulio; and the creditors who in the past lent $460 million to the private equity firm that controlled NSO, and which remains a millstone around the neck of NSO's controlling shareholder.
The dispute, which was publicized due to the appointment of a trustee for NSO's drone company Convexum, has brought about a situation in which shareholders are not sharing the full financial data with BRG, the main shareholder, which in its turn makes any sale of NSO contingent on splitting it into parts. At the same time, the creditors fear for their debt and are warning about insolvency, while the value on the market of the debt continues to shrink. According to estimates, if in April 2019, they could have received $0.90 for every dollar that they were owed, today that amount has been cut by half.
The roots of the dispute are contained in a deal conducted in 2019 by Shalev Hulio, his partner Omrie Lavie and the British private equity firm Novalpina Capital when NSO sought to re-acquire the 70% stake held by Francisco Partners. The Israeli company was then at the peak of its success with 100 customers from India in the east to Mexico in the west.
The deal ultimately worked out valued NSO at more than $1 billion. While Shalev and NSO's management held a 30% stake in the company, Novalpina acquired 70% in a leveraged deal that included a direct investment of $290 million, $100 million in shares from Hulio and his people and $400 million in loans from various banks, which were deposited in the holding company controlling NSO.
But 2019 was also a turning point for NSO, as public opinion began to turn against the Israeli company. A lawsuit filed by Facebook against it for allegedly breaching WhatsApp and a series of media investigations, including by CBS's prime time 60 Minutes, raised moral questions about the service provided by NSO's spyware to dubious regimes in the Middle East.
The revelations about NSO deepened the division between the three partners in the British equity fund Novalpina, including disputes about the active role the fund was taking in its portfolio companies. In addition to the Israeli spyware company, these portfolio companies included an Eastern European casino chain called Olympic Entertainment Group. According to "The Financial Times," one of the partners in Novalpina, Stephen Peel, resigned from the board of human rights organization Global Witness following his investment in NSO, while his wife Yana Peel resigned as chief director of the Serpentine Galleries in London.
Ultimately the three partners in Novalpina could not reconcile their differences and one of them issued a restraining order on the other two. The three partners were replaced in a swift procedure reserved for extreme situations in the investment world. The restricted investors including Centerbridge Partners and pension funds from Oregon and Alaska, sought a management company to put the assets in order and prepare them for a sale. In this way consultancy company BRG joined the NSO board in September 2021 and by the end of the year took control of the board of the group's holding company Triangle.
An exceptional fund in an exceptional situation
The new management company that took control of NSO at the invitation of the investors of Novalpina is far from being a regular financial fund which comes to add value. The special consultancy arm of BRG Assets Management specializes in handling crises in investment funds and most of the partners come from the world of legal and financial investigations. Its local representative, Howard Berkowitz, who recently acted in legal discussions in Tel Aviv over the drone company owned by NSO, specializes in forensic investigations, white collar crime and class action suits against public companies.
The mandate that BRG's professional received was to better understand what is happening in the investment fund's portfolio companies and salvage the assets as much as possible prior to a sale. When BRG assumes its role last September, the Forbidden Stories - Amnesty investigation was at its height with newpapers around the world including "The Guardian" and "The Washington Post" publishing revelations about the apparent hacking of tens of thousands of phones in dozens of countries. There was already enough smoke to prove that there was apparently a fire but it was still not clear if there was a fire and where.
In the next stage, BRG took control of Triangle, the holding company controlling the NSO Group with the chairman Asher Levy, who had been nominated by Novalpina, replaced by BRG partner Finbarr O'Connor.
Despite its absolute control of the board, BRG remained de facto outside of NSO and was unable to achieve control of the board of the Israeli company called NSO Technology Ltd. BRG claims, according to legal documents presented at court, that the company's management refused to share with it details about the full financial situation of the company and its books. NSO apparently has reasons allowing it not to share the information. It is required to ask for approval to reveal information to a foreign investor, as some of the information is classified and subject to supervision by the Ministry of Defense, Defense Exports Supervision Department. As far as is known, this approval has not been received.
An additional twist in the plot occurred just several weeks ago. Two of the partners of Novalpina, who had been stripped of their authority, are expecting success payments from their activities with the fund and are conducting legal proceedings on the matter in London and Luxembourg against BRG in order to deny the legality of its activities. The argument between the two sides has also erupted over the value of the companies: while the partners claim that the value of Novalpina in June 2021 was $2.3 billion, according to reports by "Bloomberg" BRG does not see any value in the activities of Pegasus because of the situation it finds itself in. This perhaps explains why BRG is throwing so much attention on to the Convexum drone company.
Why did NSO ask for a $10 million loan?
Despite its initial problematic relationship, the BRG fund agreed to lend $10 million to NSO at the end of October 2021 to finance the Convexum drone company. The loan was agreed after a meeting in New York between BRG representatives with Shalev Hulio and Isaac Benbenisti - during the brief spell in which the latter served as CEO to help NSO's transition to focusing on customers from exclusively democratic countries, as part of the new regulations of the new owners.
Adv. Shlomo Nass, who represents BRG, claimed in court that the fund had made the loan contingent on the money reaching NSO's drone company Convexum, which had been acquired for $4 million, two years ago. This request represents proof that the fund, which controls 70% of the Group, sees the drone company as a main asset after Pegasus had become a toxic asset from its perspective following its blacklisting by the US Department of Commerce. One month after the outbreak of the war in Ukraine, it can be said that the technology to intercept drones might be a crucial component in the future battlefield and the value of the company is rising as time passes.
The creditors make their presence felt
A third but less known major player, in the web of relationships influencing the fate of NSO, is a group of creditors waiting for the repayment of the huge debt of $500 million hanging over the Group's controlling company. The origin of the debt was in the leveraged loan taken by NSO's previous investor Novalpina in order to finance the acquisition of 70% of NSO Group from Francisco Partners in 2019.
Although the source of the debt was not in the activities of Israel's NSO Group managed by Shalev Hulio, it still weighs down the entire Group by the fact that the debt, which has Moody's lowest rating, and is owed entirely by the Luxembourg-based holding company NorthPole Newco, which affects the entire Group, and must according to estimates repay $65 million in interest annually to the creditors. Days after NSO was put on the US blacklist, Moody's lowered the credit rating to Caa2, claiming that the ability to repay the debt from revenue was low and that acquiring new customers would be especially difficult.
Despite all this, a senior source in the sector that understands this debt, said that NSO does not feel exposed to the loan because the Israeli company has not put up any surety for it.
Who are these creditors? "Globes" has been told that they include three main groups - Credit Suisse, and US hedge funds Senator Investment and Birch Grove Capital. Birch Grove Capital said, "We are not commenting on the story," and Credit Suisse and Senator declined to comment. Alongside them are other financial organizations including BlackRock, Ellington and Jefferies.
Until recently, the creditors seemed content to act behind the scenes and not draw attention. But in recent months, as the Israeli company's problems mount and the struggle between the shareholders intensifies, their voices are being heard more clearly. The debt apparently belongs to Novalpina and does not touch the Israeli company, but in discussions in court in February, there was a consensus on the fact that the creditors own the debt on the group above NSO.
Adv. Amir Dolev from the Meitar law firm presented himself for the first time at the end of February as the attorney for NSO Group's creditors during legal discussions on the fate of the Convexum subsidiary. He hinted at sales proceedings taking place behind the scenes: "Proceedings are being conducted as part of which, we believe it will be possible to maximize value as part of a purchase from above including the adding of major value," Adv. Dolev said that the sales process is being conducted with the assistance of investment banks and should be realized within several weeks although since he said this more than a month has passed.
The creditors seems to support Hulio and not BRG
Despite the position of BRG that the drone company should be spun off from NSO, it appears that the creditors support the position of Hulio who wants to retain the company ahead of a sale. "We want to benefit from saving it (the company). The aim is to reach an overall solution that also give value to controlling these companies (Convexum and subsidiaries)," Adv. Dolev said. "There are Siamese twins here and it's a kind of Solomon's wisdom - the baby will die or go to the person that doesn't want it."
What is Dolev hinting at with these words? Probably the sales process of the entire NSO Group as revealed by the protocols filed by BRG to the court with the request to spin off Convexum from the Group. Such a sale might keep the activities of Pegasus under another brand while at the same time repaying the debt to the creditors within seven years.
From the documents, it appears that the Shalev Hulio Group has hired the prestigious London law firm Mayer Brown and the Moelis investment bank, despite the displeasure of controlling shareholder BRG, in order to advance the sale of NSO together with drone company Convexum. The move has won the support of the creditors and the representatives of Credit Suisse even made contact with BRG in order to talk about the procedure, it is recorded in the protocols. One of the offers received is revealed in the court protocols: Integrity Partners, in which cybersecurity investor Elad Yoran is involved, offered to inject $300 million into the company at a valuation of $1-1.5 billion, and to grant the Shalev Hulio Group 30%, to focus on selling to Western democratic countries and to offset some of the dividends to repaying the debt by 2029.
Even if Integrity Partners ultimately agrees to buy NSO, it is by no means certain that BRG will agree to the acquisition, while Convexum is included in the deal. BRG did not approve hiring Moelis and Mayer Brown and back when Asher Levy was chairman he even signed a letter cancelling the hiring of Moelis, probably at the urging of BRG.
So the fate of NSO currently depends not only on the negotiations with this or that buyer. In the latest developments towards Pegasus's next incarnation, NSO will be required to reach agreement with the two bodies breathing down its neck" the BRG controlling shareholder and its creditors.
Published by Globes, Israel business news - en.globes.co.il - on March 29, 2022.
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