Commentary: The Partner case and how we missed the lesson

Commentary The Partner

By NITZAN COHEN
Partner, Israel's second-largest cellphone company, this week asked a court to approve its request for a massive dividend payment of NIS 1.4 billion. Partner needs court approval because the dividend is bigger than its estimated profit for the year and will require a reduction in its capital. The request was met with surprising indifference in the local capital market. The only objection came from Labor MK Shelly Yacimovich. She is upset that Partner's new boss, Ilan Ben-Dov, intends to lay off 120 workers as part of his grand scheme to milk as much cash as he can from the company he just bought. "Ben-Dov's business plan is revealed: You buy a company without bringing a penny of your own money, you lay off people and immediately withdraw an outrageous dividend to your pocket," Yacimovich said. She compared the actions to those taken by Polgat, once a leading apparel firm, which was also purchased by a group of financiers who milked high dividends and eventually went bankrupt. Yacimovich promotes a firm socialist agenda. But in this case she is 100 percent right. Partner is indeed a very good company. Its operation generates more than NIS 1b. in cash flow each quarter, and it is well-positioned and branded in the local telecom sector. Stable, cash-generating companies with extremely low competition always draw the attention of bold profit seekers such as Ben-Dov. Ben-Dov made a fortune as a dealer of Samsung cellphones and has gradually expanded his businesses to real estate and other investments through his investment arm, Tao. Through a quick an aggressive process of leveraging, Ben-Dov planned to build his own real-estate empire, but his plans took a serious blow when the global crisis hit. Tao's losses since the beginning of 2008 have been a staggering NIS 570 million, and the company has negative equity (more liabilities than assets) of about NIS 300m. If you think someone facing this kind of mess will have trouble raising capital and expanding his business, think again. Tao's troubles did not stop Ben-Dov from winning one of the most important deals made in the local market in recent years: buying a controlling stake (51%) in Partner from Hutchison for NIS 5.3b. The purchase was made through another company of his, Scailex. Ben-Dov financed the deal in a preferred manner of local and global business tycoons: risk as little as you can of your own money. Only NIS 1b. was paid by Scailex; the rest came from banks and Hutchison. But where did the NIS 1b. come from? You guessed right: from debt Scailex raised from institutional investors and banks. Scailex's debt was NIS 110m. at the end of September 2008; a year later it jumped to NIS 1.7b. You have to give Ben-Dov credit for this bold move, especially for doing it while another company of his is facing insolvency. But still, taking on such huge amounts of debt, even for a fine asset like Partner, is a heavy burden that must be dealt with immediately. Ben-Dov has already raised NIS 900m. by selling some of the shares he bought to other investors including Leumi Partners, but the backbone of his ambitious plan has always been milking Partner's rich cash cow. Partner enjoys a healthy balance sheet, with equity of NIS 1.9b. and total liabilities of NIS 3.35b. But distributing a NIS 1.4b. dividend is definitely going to change that. In fact, Partner plans to finance the dividend through public debt and worsen its financial ratios across the board. This is all taking place during a recession, which has already taken its toll on the company. Partner's operational profit dropped by 23% during the last quarter, and the company still face threats of more aggressive pro-consumer regulation and maybe even more competition from a fourth serious player (Mirs, with a new ambitious owner, has entered the market). Ben-Dov's motives are pretty clear: He is following in the footsteps of another, bigger tycoon, Nochi Dankner, who made similar moves when he took control of Cellcom, Partner's biggest adversary. Ben-Dov has ambitious plans and needs that dividend to bring them to fruition. But the questions we should be asking, and this is where Yacimovich is right, are: Is this policy also what's best for the company? Are the risks taken by giving up huge amounts of money and loading the company with more debt too big? Isn't there anyone in the company's board of directors who thinks making this move isn't in the company's interest? I am far from being a socialist, but there is something very wrong when 120 people - and maybe more in the future - have to go home not because the company is losing money or facing difficulties but because an owner has taken on lots of debt. It's even more disturbing when we bear in mind that the people who took the most risk are all of us, including the soon-to-be unemployed workers, through our pension funds. What will happen if the grim forecasts materialize and this massive milking of cash ruins Partner? The public will lose twice: savings will dissolve and hundreds of families will lose their livelihood. I think Partner's case demonstrates that we haven't learned our lesson from the recent economic meltdown. The entire global mess was caused by a faulty risk-management structure. A dangerous musical-chairs game of ever-growing leverage ended with a crash, and trillions of dollars of taxpayers' money disappeared. This is what happens when businessmen don't have to risk private money when they do business; this is what happens when institutional investors can't see beyond next month's yield and the year-end bonus. Partner is a good company. Ben-Dov, who besides being in business is involved with several charities, seems like a good man. I wish them both success. But I can't help thinking about Polgat after its owners milked the company for all it was worth. Maybe it's time our legislators figure out what can they do to avoid these kinds of tragedy in the future. This is not a matter of socialists verses capitalists; it's a matter of having proper rules. If our legal system can put enough restraints on leverage levels and better supervise the system that manages our retirement savings, both the tycoons and the simple workers will benefit.