The frequent flyer deal shows El Al’s under-pricing

by time news

The Phoenix enters the airline club: the world of tourism and aviation is returning to normal as it adapts to life alongside the Corona virus, and accordingly the financial results and shares of the airlines show an improvement. However, it seems that as far as El Al is concerned, the market still underprices its aviation activity.

Yesterday, the Phoenix decided to exercise earlier than expected an option it was given to purchase a share of the frequent flyer club. The insurance company will purchase 19.9% ​​of the club’s shares for $14 million through a share allocation. The Phoenix received the option, which it can exercise until 2028, last June, when it reached an agreement under which it loaned El for 130 million dollars – a deal for which other entities competed, including Bank Hapoalim, Shufersal and Elektra Khemeh. The option given to Phoenix is ​​to purchase up to 25% of the shares. Now Phoenix has chosen to purchase 19.9%, so El Al will continue to own 80.1% of the club.

The reason why Phoenix now only acquires 19.9% ​​of frequent flyer shares is regulatory. An insurance company, being a financial entity, cannot own more than 20% of a real entity without obtaining approval from the Capital Market Authority. The authority has not yet granted the company such a permit. Later, Phoenix, which is managed by Eyal Ben Simon, will be able to exercise the remaining option.

As part of the loan agreement, it was determined that the Phoenix would be able to purchase the shares based on an activity value of about 400 million dollars for the frequent flyer club, even though El has a valuation that gives the club’s activity a price tag of 500 million dollars. The current deal reflects an activity value of 340 million dollars for the club. The value of the club in the transaction, i.e. the value of the equity, is 90 million dollars. The gap between the value of the shares and the value of the activity is a result, among other things, of the deduction of the debt to Phoenix itself. The remaining difference arises from future adjustments and dividends that have already been capitalized in the transaction.

According to El Al, due to the transaction, its equity in the third quarter will increase by 63 million dollars. According to people close to the deal, El Al, which is managed by Dina Ben Tal Ganassia, asked the Phoenix to exercise the option now to increase the equity in the third quarter reports.

The value of the club’s activity is higher than the market value of El Al, which trades at a value of only 655 million shekels. The stock reacted to the exercise of the Phoenix option with a 3% drop. In other words, since Al Al, whose operating value is approximately $2.2 billion, will continue to own 80% of the club, this means that the market is underpricing the company. This can indicate that the investors are not aware of the company’s potential, and alternatively that they do not believe that the company will be able to realize the potential.

At the beginning of the week, an amendment was signed to the agreement between the state and El, according to which the company will advance a payment of 45 million dollars to the state, from which it took large loans. El Al, which was supposed to pay off the debt in two years, agreed to pay it off by the end of 2022. Due to the repayment of the loan, restrictions related to the salaries of pilots and executives at El Al will be removed from the company.

This is not the state’s only concession to God. The company committed to raise at least $62 million in a share issue by September 2022, but as part of the revised agreement it was determined that the fundraising could be carried out until April 2023. Another clause in the revised agreement allows El Al to convert the issue by transferring $62 million of the $115 million capital gain it will record due to the passenger club constant to a capital fund, and distribute the amount as bonus shares in such a way that it will not be possible to use the amount to repurchase shares or to distribute a dividend. In other words, El Al will not be obligated to carry out the capital raising in question.

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