Bezeq to distribute preferential stock to prevent future owner from distributing dividend

Company source says the equity restructuring will protect workers' rights
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yesterday announced it will be distributing preferential shares at a ratio of 1:2.

Each holder of a Bezeq share will receive two more shares. The price of the regular Bezeq share will be reduced to leave the total value held by each shareholder unchanged. Ostensibly, this is a standard procedure.

But in practice, the issue of preferential stock will prevent the future owner of Bezeq, which is today controlled by the Israeli government, from handing out significant dividends. As the new controlling shareholder will by definition hold the most shares in the phone company, the restructuring of Bezeq's equity will effectively prevent it from distributing dividends in order to return at least part of its investment by this method.

The Government Companies Authority will probably a 51% controlling interest in Bezeq to a private investor in 2001, through a tender process. Bezeq's value for privatization will apparently come to about $4 billion.

Distributing dividends after a takeover isn't an original move. That is what tycoon Yitzhak Tshuva did shortly after acquiring the


group. The Borowitz family did the same after taking over the Tel Aviv Stock Exchange-traded Granite Hacarmel. Although the new owner may well sleep better at night, the move leaves the company's available cash diluted and forces it to finance its activity with credit.

Bezeq's board probably decided on the equity restructuring hand in hand with the Finance Ministry and Communications Ministry.

Bezeq's equity is made up of three main components:

1. Share capital.

2. Capital funds (sums paid for stock beyond their nominal price, as well as various funds based on capital gains accumulated in the company but left unrecorded on the profit and loss statement).

3. Surpluses (profits the company accrued over the years).

Bezeq may hand out as dividend only gains accrued under its Surpluses item. To avert distribution of a dividend, Bezeq is expanding its share capital by NIS 1.6 billion, while reducing its Surpluses by a similar figure.

For the first three quarters of 2000, Bezeq's surpluses come to NIS 1.8 billion. So in fact, handing out the preferential stock leaves just NIS 200 million for potential distribution.

Before selling control in Bezeq, the company may be raising NIS 900 million from institutional investors to finance its early retirement plan ahead of privatization. After the placement, the state's holding in Bezeq will be reduced from 55% to 51%.

A high-ranking source in Bezeq confirmed to


that the issue of the preferential stock comes only to prevent a dividend handout after control in the company is sold, and to ensure employee security after the sale.