The shares of Elco Holding Company, led by the brothers Danny and Mikey Salkind, have soared by about 140% in recent years against the backdrop of acquisition and exercise transactions that have yielded handsome profits. A healthy cash flow and low leverage enable the Group to compete in almost every major deal that hits the market.
By Aviv Levy
It seems that in recent times the name of the Elco Group, including that of its various subsidiaries, has surfaced as a potential competitor in almost every major deal that is on the market - and these are not lacking during the corona period. Energy, aviation, real estate, retail or transportation – Elco, controlled by the brothers Daniel (Danny) and Michael (Mikey) Salkind, is interested in buying, even if it does not always work out in the end.
On the other hand, the Group does not hesitate to take advantage of opportunities to exercise its transactions, even within a short time following the acquisition, in case it’s possible to do so at a handsome profit. Last year’s sale of the cellular company Golan Telecom is an excellent example thereof, as is the IPO of the energy company Supergas on the Tel Aviv Stock Exchange.
The latest deal envisaged by Elco involves one of the largest holding companies in Israel - Discount Investments, which was put up for sale following the collapse of the controlling shareholder, the IDB Group. It was reported that Elco is joining the acquisition offer of the real estate company Mega Or made to Discount Investments, and Elco's stake in the investment, if approved, is expected to amount to approximately NIS 400 million.
Thus, three and a half years since the passing of Gershon Salkind, the founder and mythical controlling shareholder of Elco, it seems that under the management of his sons, co-CEOs Danny (60) and Mikey (54), the Group is becoming a well-oiled machine of generally successful acquisitions, such that investors on the Tel Aviv Stock Exchange do not remain indifferent to its performance. During the period in question, the company's share recorded a jump of about 140%, and its price reflects Elco's current value approaching NIS 4.5 billion. The brothers' share is about 65% of the capital, worth almost NIS 3 billion.
Salkind Sr., as a loyal representative of the old economy, established the holding company he founded and developed on solid foundations, in the areas of infrastructure, retail and real estate, in addition to acquisitions of competing companies with complementary activities.
It seems that his sons are trying to take Elco one step further, with the development and expansion of traditional businesses alongside the addition of additional activities. Elco is carrying out its expansion moves by itself as well as through its four public subsidiaries: Electra (one of the leading contractors and infrastructure companies on the market), Electra Consumer Products (ECP, which manufactures and markets consumer products in the field of electricity), Electra Real Estate (income-producing real estate), mainly in the American market) and Supergas (purchasing, storage and marketing of gas, natural gas and electricity). The Group's policy, in most cases, is to make significant acquisitions of companies with leading brands, and with a potential for synergy with the Group's companies.
The brothers dictate the entire strategy of Elco. On the one hand, they are the ones who examine the acquisitions and mergers that the company examines from time to time. At the same time, the two oversee from above the implementation of the strategy in each of the companies of the Group, on whose boards they sit. At the same time, the two maintain the independence of the CEOs of the subsidiaries and support them thanks to their relations and experience.
Danny and Mikey, say people close to Elco, complement each other. Mikey is considered the financier who knows the details in depth, and Danny is more perceived as the business development and marketing man. The relationship between them is brave, and they know how to work together in cooperation. The Group will follow through only if they agree on a business decision. They handle the acquired companies according to the need and the condition of the company, which include, if necessary, streamlining processes, changes in management and reorganization.
Trying to Create a Fifth Arm of Operations
Elco is now aiming to create a fifth arm of operations, as it operates with a high level of liquidity (NIS 1.1 billion in cash at the end of the third quarter last year) and a low level of leverage (its net financial debt is only about NIS 200 million) allowing it to be interested in making large-scope investments, taking advantage of opportunities created during the corona period.
Thus, about a year ago, Elco examined, among other things, the possibility of acquiring Israir Airlines with an investment of about $ 55-60 million (together with Kedma Capital), and in another large deal that did not materialize, it sought to acquire Delek Israel (together with the Allied Group), according to a company value of about NIS 1.2 billion.
After these two deals became no longer relevant, Elco is now trying to expand its operations by joining the group of buyers of Discount Investments, as aforementioned, and at the same time, its subsidiaries are also seeking to take advantage of the fact that many properties are entering the market, whether due to owner distress or other reasons.
Thus, Electra Consumer Products recently became interested in acquiring the Beitan Wines supermarket chain, with an investment of several hundred million shekels; Electra has agreed to acquire Amnon Mesilot in the sector of public transportation at a company value of approximately NIS 150 million; Electra Real Estate is identifying an opportunity in the hotel sector, and informed us that it is examining the possibility of establishing an investment fund in the industry.
* Value of the acquired company ** estimates
The move made by Elco with regard to Supergas accurately demonstrates its value-producing capabilities from acquisitions, aided by extensive external financing that increases the return on equity from the transaction. Elco completed the acquisition of Supergas from the Azrieli Group in November 2019, for more than NIS 800 million. However, the purchase cost for Elco was significantly smaller, because it financed the transaction, among other things, with a loan taken by Supergas itself in the amount of NIS 320 million.
Less than a year later, Elco completed the IPO of Supergas on the Tel Aviv Stock Exchange, at a company pro-money valuation of about NIS 1 billion. Thus, within a few months, Elco generated a profit of about twice as much as the investment it made, and as of today, Supergas is traded at a market value of NIS 1.2 billion, which reflects Elco's holdings therein (approximately 62%), a value of approximately NIS 750 million.
Whereas in the case of Supergas, we are, in the meantime, dealing with a profit that is "on paper", a few months following the IPO, Electra Consumer Products presented last year one of the most impressive appreciation and exit transactions of recent years, with the completion of the sale of Golan Telecom to its rival Cellcom, while generating a fantastic profit of about half a billion NIS since its acquisition in 2017.
In this case, too, while the total transaction for the acquisition of Golan Telecom reached NIS 350 million, the equity received from Electra Consumer Products amounted to about NIS 80 million only, and the rest of financing for the acquisition came, at the time, from Cellcom (approximately NIS 130 million) and from banks (approximately NIS 140 million).
Dealing with Huge Losses
In the past, Elco faced quite a few challenges, including various problems it had in air conditioning production operations that it held abroad, which led it to a huge cumulative loss of nearly a quarter of a billion NIS between the years 2012-2014.
In addition, it has faced significant losses presented by Electra Real Estate, following a wave of overseas property acquisitions it made before the previous global economic crisis, as well as during the economic slowdown and the growing competition in the business sector of Electra Consumer Products - which has also led to significant losses.
However, unlike other prominent public holding companies (including Africa Israel, IDB and Elbit Imaging) that collapsed one after another, Salkind and his sons managed to deal with the previous global financial crisis, reduce the leverage, and redirect Elco back to financial strength and to new investments.
The drama that gripped the markets last year following the coronavirus once again proved Elco's resilience to crises. Although during the first quarter of 2020 the company's stock suffered sharp value declines (more than 40% in less than a month) thanks to the fact that most of its activities were not materially affected by the spread of the virus, the stock rose again and presents an annual positive return of close to 30%.
Elco has been enjoying the rise in the value of the shares of its subsidiaries for many months and is also using this to exercise shares in its holdings, mainly at Electra Consumer Products, for a cumulative value of about NIS 210 million within six months. In recent days, Elco has sold a little more than 3% of Electra Consumer Products shares, for about NIS 90 million. The exercise took place after a jump of nearly 160% presented by Electra Consumer Products shares a year ago, whose price reflects the company's value approaching NIS 3 billion.
There Also Were Less Successful Investments
Alongside the less successful investments that Elco has made in recent years are those made in the media sector, which it entered in October 2017 with the acquisition of the Globus Max cinema chain from a stay of proceedings, for about NIS 145 million (with the help of a bank loan of NIS 85 million).
Moreover, Elco's financial statements also reveal that since 2018 it has invested $ 13.5 million in the shared workspace company MIP (Meet In Place), which operates in the sector of conference room rentals in Tel Aviv, New York and London, and has committed to invest an additional $ 5.5 million in 2020.
Both Globus Max (which changed its name to Hot Cinema) and MIP have suffered a significant deterioration in their business following the corona crisis, which led to the closure of operations. In its most recent financial statements, for the third quarter of 2020, Elco recorded a reduction of NIS 34 million on its investment in MIP, while Elco Media (along with other holdings) caused Elco a loss of NIS 16 million in the first nine months of 2020.