Israel’s newest tycoon has his work cut out for him
Tzahi Nahmias was already very rich when he acquired Discount Investment Corp. a few months ago. But he doesn’t play the role of tycoon: He doesn’t work around the clock and his property company, Mega Or, occupies modest offices in Moshav Shilat with a discount supermarket on the ground level. He and his family live in the same moshav.
“If you know how to make the right decisions and have a team you can rely on, you don’t need to be working 24/7,” he once told an associate.
But those who have done business with Nahmias say there’s a difference between his public and private personas. “At Mega Or, which is publicly traded, Nahmias conducts himself modestly and efficiently, but in his private life he lives well (for example, he owns several luxury cars). Even when he’s taking time off, he spends a lot of time thinking about how to build his business. So far, he’s been successful at it,” says someone who asked not to be identified.
Nahmias is busier than ever these days as he takes control of Discount.
Two weeks ago, he completed the first part of a complicated two-part 980 million shekel ($300 million) takeover of the firm, whose parent company, IDB Development, was forced to sell after it was declared insolvent due to a two billion shekel debt to bondholders. Mega Or couldn’t buy Discount by itself due to restrictions imposed by the Business Concentration Law. So, the acquisition was split into two: A group of investors led by Mega Or bought 47.4% of Discount and in the second stage Mega Or will buy 24.9% in three months.
Discount’s holdings controls some leading companies on the Israeli scene, including Cellcom Israel (the country’s biggest mobile operator), the property developer Property Building Ltd. and the agricultural products company Mehadrin. “Nahmias isn’t a magician and there’s no reason to expect Discount to double its value in a short time. But, to his credit, it has to be said that he didn’t run away from the deal and that he’s met all his obligations,” one institutional investor said.
Discount shares closed up 0.9% at 10.40 shekels on the Tel Aviv Stock Exchange on Monday, leaving it with a market capitalization of about 1.45 billion shekels.
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“He has a lot of time to think about what to do with Discount. Now the moment of truth has arrived, where he’ll need to show that he’s capable of moving up to the major leagues and succeed not just in real estate,” the investor said.
Nahmias’ co-investors bring a wealth of experience to the job. They include Rami Levy, the discount-supermarket king, who holds a 10.8% stake in Discount. In addition, Levy recently acquired control of the Israeli airline Israir, along with Haim Shalom. Another, Chen Lamdan, controls the logistics and shipping company Orian. Two of the others are hoteliers David Fattal and Sefi Zvieli.
The rest of the shares are supposed to be acquired by Elco Holdings. Under Daniel and Michael Salkind’s control, Elco has emerged in the last few years as a major holding group in Israel with a market cap of 4.5 billion shekels.
But Elco can only join the investor group if it gets clearance from regulators in connection with Cellcom and the concentration law. If it fails to do so, the shares will probably be sold to institutional investors.
Over the last 20 years, Nahmias has turned Mega Or from a company with a handful of assets into a company with 45 properties covering 560,000 square meters of floor space. Occupancy rates run at 96% and generate net revenue of 200 million shekels a year. In the last two years, Mega Or has sold hundreds of millions of shekels in properties and paid out dividends of 200 million shekels. But it is also expanding, with 14 properties in development.
Mega Or shares have climbed 400% in the last five years, giving it a market cap of 3.5 billion shekels, an 80% premium of its shareholders’ equity. Nahmias’ share in that amounts to 1.34 billion.
The secret of Nahmias’ success is his ability to tap into capital from people like Levy as well as years of low interest rates that have enabled him to borrow without diluting his control, conservative financial management and his having seen early on the potential demand that would arisfor big logistics centers.
Nahmias’ success convinced him to move into other businesses through mergers and acquisitions. His first venture was buying control, together with mall developer Big, of Africa Israel Properties, for 1.25 billion shekels, after it was declared insolvent.
With Discount, he faces his biggest challenge ever. The stock market is optimistic: Even before Nahmias and his partners have taken any operative steps, Discount shares have been rising, adding 100 million shekels to its market since the deal was signed. Its bonds trade at a low 3.2% yield, a sign that investors are confident it will be able to repay its 3.2 billion shekels in debt. One reason for that confidence is that it has 1.5 billion in cash on hand, enough to cover its obligations for this year and next.
Discount is nothing like the company it once was. Besides it current holdings, it once controlled Shufersal (Israel’s biggest grocer), the agrochemicals company Adama, the medical-imaging company Given Imaging and even shares in Credit Suisse. Still, Discount has potential.
Nahmias joined the boards of Discount and its subsidiaries two weeks ago. He is expected to lead efforts to cut costs at Discount group, which occupies luxurious offices in Tel Aviv’s ToHa Building. The number of directors will be reduced at the group’s companies to five or six. Instead of two CEOs for Discount and Property Building, both of them holding companies, one person will fill both jobs. Other management-overhead cutbacks aim to save tens of millions of shekels annually.
More savings are planned by retiring high-cost bond debt of Discount and Property Building, which averages 5%. Epsilon, an investment management and underwriting unit, will be sold as will a minority stake in Brinks Israel.
Property Building will require special attention. Although it accounts for half the value of Discount’s portfolio, it has mostly missed the real estate boom of recent years. But it does have 24 billion shekels in cash on its books.
What interests Nahmias the most is the Property Building’s 30%-owned subsidiary Gav Yam. It is regarded as one of the country’s most successful developers of high-tech and industrial parks, office and housing. It has 8.2 billion shekels of real estate and 2.5 billion of liquid assets.
However, Aaron Frenkel amassed a 35% stake in Gav Yam last year in an attempt to take over the company at the same time that Nahmias was negotiating to buy Discount. The question is whether the two of them will cooperate or continue buying shares in a race for exclusive control.
Nahmias and partners intend to sell off Property Buildings’ U.S. assets, including the HSBC Building in Manhattan, which earns a paltry 4%. It will also sell its 64% holding in IDBG, which has a property portfolio worth about $125 million, and investigate whether to divest of stakes in Norstar (the parent company of Gazit Globe) and Sela Real Estate.
Because gaining control of Gav Yam will be complicated and expensive, Discount’s new owners plan to use Nave-Gad, a Property Building unit, as their flagship residential real estate arm. Nahmias also sees potential with Mehadrin’s farm products business.
As to Cellcom, Nahmias has chosen not to serve on its board and will rely on the Salkinds, who gained experience in the mobile business during their brief ownership of Golan Telecom (which they sold to Cellcom last year).
Cellcom shares have fallen by more than 25% this year and the firm carries 3.2 billion shekels of bondholder debt. It has to contend with strict regulations and intense competition, which last year left it with a loss of 170 million shekels, up from 107 million in 2019.
The new owners are looking for growth engines they can develop in Cellcom, building on cost-cutting, improved service and the advantages coming from its acquisition of Golan. They hope that this advantage together with their investment in infrastructure in the past year will boost cash flow and profitability. It will, however, take time.