June 17, 2020

The Supergas IPO: The Salkinds’ Great Achievement - and the Company’s Threat

TheMarker | Capital Market

The Supergas Energy Substitutes Company, which was acquired by the Salkind family, raised NIS 270 million in an IPO of 25% of its shares ■ The proceeds will be used for the development of power plants and of the natural gas sector for transportation, and to reduce the leverage ■ The company is preparing for the issuance of bonds ■ A NIS 100 million profit for Leumi Partners and Phoenix

Eran Azran

Michael Rochwerger

Brothers Mikey and Danny Salkind, the controlling shareholders in the Elco Group (-1.97% 12910), recorded a significant achievement yesterday with the successful IPO of its subsidiary, Supergas Energy, on the stock exchange. The offering was made at a relatively high effective value of NIS 872 million (pre-money) - double the value for which Elco acquired it from the Azrieli Group in 2019. As a result, Elco's share jumped about 7% yesterday.

Supergas’ IPO took place in the format of a non-uniform offering, which allows securities to be offered at various prices to various investors. Demands were recorded of approximately NIS 420 million. Of the demand, Supergas raised NIS 270 million, at a price of NIS 77 per share, and issued 25% of its shares. In the offering participated institutional entities such as More, who was an anchor investor; Migdal; Yellin Lapidot; Phoenix and Menorah Mivtachim.

Around the date of the IPO, Leumi Partners and Phoenix (+ 0.86% 1526) - two entities that granted a loan to Supergas when acquiring it from Azrieli - intend to convert the debt they granted into shares, totaling 2.5 million convertible bonds, so that the value of Supergas will amount to approximately NIS 962 million. However, from this value, one must reduce the proceeds that will be channeled inwards into the company - NIS 91 million - so that the effective value is NIS 872 million.

Supergas is engaged in marketing energy substitutes - such as LPG (cooking gas), natural gas and compressed natural gas - for 400,000 household and 5,000 business customers. Energy substitutes are used to operate burners in the industry sector, to operate furnaces, to heat institutions, to heat chicken coops for agriculture as well as for household heating and cooking. In addition, during the past year, Supergas started initiating projects for the establishment of natural gas-powered cogeneration stations for industrial customers (franchised) for the purpose of generating thermal electricity and energy.

The high value of the offering – as a result of which it might enter the TA 90 (-0.62% 1312.13) is attributed to several factors. First, the deal with Azrieli a year ago reflected the two main activities in the field: supply of gas for cooking and natural gas for transportation. Since then, Supergas has expanded into the power plant sector and has signed new contracts to establish stations across the country.  The company continues to gain momentum: The company is currently setting up five sites and has signed and is conducting negotiations regarding electricity supply agreements totaling 46 megawatts. The company has set itself a target of reaching a production capacity of 70-100 megawatt stations in the coming years.

The proceeds from the offering will be used by Supergas to expand its power plant operations, along with the continued development of the natural gas for transportation sector. Part of the proceeds from the IPO will be used to reduce the leverage, which increased after the company was acquisition from Azrieli (Elco financed part of the transaction costs through a debt relief for Supergas). Today, the ratio of Supergas debt to its operating profit (EBITDA) is about 3.3.

Upon completion of the shares offering, Supergas also intends to raise negotiable bonds and repay by raising a series of private bonds issued at relatively high interest rates which are currently traded among institutional bodies, as well as expensive bank debts. The proceeds of the bond offering will be added to the NIS 100 million in the company’s coffers, to the NIS 270 million raised in the offering of shares, and to the NIS 91 million received from the conversion of the debt by Leumi and Phoenix.

The main risk that threatens Supergas is the state's intervention in the cooking gas market - which is not considered to be particularly competitive.

The cooking gas sector in Israel does include some companies operating therein, but is not considered to be a particularly competitive field. The market is estimated at NIS 2 billion a year - of which NIS 800 million comes from the household sector. According to estimates from the Ministry of Finance in the past, collection of household gas consumer surplus amounts to more than NIS 400 million a year. The reason for this is that this market is controlled by three large suppliers who control 75% of the market, involving harsh competition barriers, which already led to another cartel affair (and convictions) about 15 years ago.

In a 2017 report, the state comptroller determined that households pay almost twice the price paid by the institutional sector (industry and agriculture, hospitals and nursing homes). According to the comptroller, there are significant competition shortcomings in this industry, causing households to absorb excess cost. This shows that the main risk that threatens Supergas is the state’s intervention in the gas sector - for example, through price controls, which of course is expected to harm the investors in the IPO.

Elco acquired Supergas last year through a private subsidiary (98.75%) - Supergas Energy. The transaction was carried out at an equity value of approximately NIS 450 million. For Supergas, Elco paid approximately NIS 817 million, a consideration that reflected the company's value at the time (including debt). Elco paid NIS 567 million in cash, and the balance is paid in seven installments, every 12 months.

Leumi and Phoenix's Big Profit

To complete the deal, Elco borrowed, via Supergas Energy, approximately NIS 91 million from Leumi Partners and Phoenix in equal parts. The loan was granted for a period of ten years, at an annual interest rate of only 0.5%. In addition, Phoenix and Leumi received stock options that allow them to purchase up to 20% (half to Leumi and half to Phoenix) of Supergas Energy shares during a period of ten years, at an exercise price equal to Elco's investment.

Supergas's IPO is currently generating very high profits for Leumi and Phoenix. Following the IPO, Leumi and Phoenix will each hold approximately NIS 95 million worth of shares. For both entities, the consideration reflects a 2.1 times gain on the money; That means a profit "on paper" of approximately NIS 50 million for each.

Leumi Partners and the Elco Group have extensive business relationships. Elco is a partner in the US real estate fund operations of Electra Real Estate. In addition, Elco and Leumi Partners are currently negotiating with Yitzhak Tshuva to purchase gas stations and convenience stores from Delek Israel. Leumi Partners also cooperates on transactions with Phoenix and the partners acquired last year 20% of a transportation company for a total of NIS 500 million.

Supergas ended 2019 with a pro forma income of approximately NIS 577 million, with a net profit of approximately NIS 67 million.  The company’s operating profit (EBITDA) amounted to approximately 154 million NIS, compared to NIS 149 million in 2018. The company has a dividend distribution policy of at least 40% of its net income each year. In the first quarter of 2020, the company recorded an increase in revenues of approximately NIS 188 million, along with a net profit of NIS 29 million and an EBITDA of NIS 56.8 million.

The Supergas IPO was led by Epsilon, Poalim IBI and Leumi Partners.

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