Commentary: Eltek: Tiny company, huge share turnover

The global industry of electronic-circuit production, which has been in a mergers and acquisitions process, has now reached us in Israel.

By SHLOMI COHEN/GLOBES
stocks 311 (photo credit: AP)
stocks 311
(photo credit: AP)
For several years the global industry of electronic-circuit production has been in a mergers and acquisitions process, as big companies swallow up the smaller companies that have not succeeded in taking off. Earlier this month it reached us in Israel.
Since the collapse of the telecom sector in the crisis at the beginning of the decade, mass production of printed circuits moved to the East, beginning with Taiwan and later to China. Nokia, for example, in one year buys circuits for 400 million telephones, and only giant factories in China, under its tight quality control, are able to produce for it such giant quantities at competitive prices.
The circuit makers that remain in the West have been forced to abandon mass production in favor of more unique and profitable smaller niches, in sectors such as industry, health-care and primarily defense industries.
The latter, for secrecy reasons, don’t send the East the sensitive work of producing circuits for fighter jets, missiles or combat vehicles.
After circuit maker Cidav recently closed its doors due to difficulties, there are only three significant circuit makers left in Israel, who provide services for the defense and communications industries: PCB Technologies Ltd., Eltek Ltd. (which I own in my portfolio tracked at Globes) and Melta-Inter Industries Ltd.
subsidiary Melta Circuits Ltd.
By the way, Israel has a much larger presence in machines that inspect and produce the circuits themselves, including those of the giant producers in China, through Orbotech Ltd., whose annual sales in this sector are double those of all the circuit makers together.
Two weeks ago, the largest in the field, PCB, bought the smallest, Melta. The two are located not far from each other in northern Israel.
Petah Tikva-based Eltek has annual sales of $35 million- $40m., a break-even bottom line, and a market cap of only $8m. The controlling shareholder of Eltek is gas and media tycoon Yosef Maiman, with a minority stake of 24 percent, and the rest is held by the public. It seems logical to assume that Maiman is also seeking a way out of this tiny investment; as a first step, he left Eltek’s board this year and left his people there.
In a conversation with Maiman at the beginning of the year, he told me his ownership position at Eltek had come about completely by chance. On a business trip to Yugoslavia related to agricultural farms – before civil war broke out there – he was asked to set up a printed-circuit facility there.
Maiman bought Eltek here, with the goal of gradually transferring the machines and know-how to Yugoslavia, but the civil war that started in the early 1990s sidetracked his plans.
Instead of landing in Yugoslavia, Eltek listed on Nasdaq in January, 1997.
Since then, it has struggled to take off, even though it underwent a business transformation – from a company that sold only to the crashing telecommunications sector a decade ago, to unique niches today.
With two facilities, in Germany and in Petah Tikva, Eltek produces primarily special rigid-flexible circuits for the medical and defense industries here and overseas.
For example, it makes the tiny circuits for Given Imaging Ltd.’s pill camera, or those that need to work in conditions of tremendous heat and pressure inside various types of missiles for Israel’s defense industry.
Despite the special technologies that Eltek has, and even though this year it received special authorization to manufacture in Israel for the US defense industry, its liquidity situation is “at the edge,” Maiman said, and it does not have the funds to invest in equipment, which is necessary for strong growth in the US market.
For Maiman, investing several million dollars in Eltek through a rights offering or private placement is like a walk in the park, similar to how Zohar Zisapel saved Radcom Ltd. in the latest crisis, which today is worth more than 20 times than it was in the summer of 2009.
Since there are no signs that Eltek is going to raise money from the owners anytime soon, I assume it is on the shelf to be sold. Investors who have followed the trading in the shares in recent months can see there has been a major accumulation.
In recent months, about 2 million Eltek shares have changed hands, which is 30% of the company’s shares and more than 40% of its float (not including shares held by Maiman and company managers). However, no new party has reported that it has a holding above 5%.
Even though it is tiny in its field, Eltek can definitely be an interesting target for US companies in the circuit field: because of the uniqueness of its technologies; because it is close to the Israeli defense industries, which are considered a big target market for US manufacturers; and because it has a European presence through a subsidiary in Germany.
In the US, the circuit sector is led by TTM Technologies, with expected sales of $1.5 billion in 2011, after it closed a giant acquisition in Hong Kong this year. Little Eltek probably does not interest it.
In contrast, the secondbiggest player in the field, DDi, with expected sales of $300m. in 2011, built itself in recent years through small acquisitions – but only in North America.
In my opinion, not too much time will pass before we know why there has been such high turnover in Eltek shares recently, and I assume the reason is not a huge business transformation.