What will DSK do with the proceeds from the sale of Shufersal?


Last week, something fell in the Israeli capital market. DSK and Shufersal are no more. The mother and daughter company that survived the second intifada and the 2002 recession in the Recanati era collapsed, and the 2008 social protest and crisis of the Nochi Dankner era were forced to part ways with Eduardo Elstein.

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This is not necessarily bad news. DSK separates from Shufersal when the subsidiary’s share is close to an all-time high. This is a deal that did not stem from the subsidiary’s weakness, but from the parent company’s distress. DSKS ‘financial debt, which amounts to NIS 3.7 billion, began to burden the parent company and threaten its stability. . The management of DSK understands that if the bonds are sailing at a double-digit yield, it is better for the company to take action, and take the initiative into its own hands before the bondholders do so.

The immediate effect of the sale of the holding in Shufersal shares will be reflected in DSKS ‘balance sheet in two ways. First, DSKS’ leverage decreased from 75% before the transaction to 60% -65% thereafter. Second, the transaction will flow almost NIS 1.5 billion into DSK’s coffers and increase its liquidity balances to NIS 2 billion.

A combination of a decrease in leverage and an increase in liquidity could explain the enthusiasm of investors in DKSH’s bonds in the face of the transaction. Accordingly, bond yields also shrank and those of the long and large series (Series 10) fell by 3% and are currently trading at 10.2%.

According to the repayment schedule of the bonds, by the end of 2020 DSKS is required to meet principal and interest payments of NIS 1.96 billion. On the face of it, DSKS ‘liquidity balances guarantee the debt service for the next two and a half years. Why only “on his face”? Because DSKS, which is Discount Investments, as its name implies – an investment company. Since investments are its purpose and essence, the chances of the money lying idle in the coffers are slim.

As far as DSK’s bondholders are concerned, there are three possible scenarios regarding the use of the company’s cash register. The optimistic scenario is that DSK will take advantage of its lucrative cash fund to reduce its high financial debt, which collects interest payments of NIS 200 million per year. The debt can be reduced in a variety of ways, from self-purchases of bonds in the market, through early payments, to For purchase offers for bonds.

The interim scenario is that DSKS ‘management will use the proceeds from the sale of Shufersal shares to make new investments. It seems that investors in the capital market mark the minority shares of the subsidiary Properties and Building (74%) as a possible target. This fact is reflected in the last two trading days. Of properties and building rose by 22% while in those days the real estate index fell by 2%.

Eduardo Elstein Photo: Amit Shaal

The pessimistic scenario for DSC bondholders would be a dividend distribution to shareholders. If the first two scenarios are based on the use of proceeds from the sale of Shufersal to purchase assets (debt or shares), then the distribution of a dividend is an event in which money goes out of the company without any consideration against it.

The balance of deserving profits of DKSH as of March 31 was NIS 397 million and is based on the net profit accrued in the last eight quarters, less dividends and the purchase of shares in the last two years. Of NIS 1,287 million recorded in the second quarter of 2018.

Assuming that DCS does not carry out a last-minute snatch before the second-quarter reports are published, the only way to distribute a dividend is to apply to the court for approval of a dividend that does not meet the profit test. Although this is not a breakthrough vision, IDB consultants are already practicing It is likely that bondholders will be vigilant to hostility to any attempt by DSC to apply to the court for approval of a dividend distribution that does not meet the profit test, and it is to be expected and hoped that the company’s board will refrain from making an effort to implement it.

Even assuming that DSKS ‘management will refrain from new adventures, the nature of the company changes substantially. Shufersal, which was the most significant asset in terms of market value in DSKS’ portfolio, was also the stable asset in the portfolio. A reminder of this could have been obtained in the Corona crisis. On the day that Shufersal descends from the shelf of DKSH, the holding company’s asset portfolio is more exposed to the real estate, communications and technology industries. The new mix in DSK’s portfolio embodies alongside higher potential, also more significant risk.

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