As CEO of Discount Investment Corporation (TASE: DISI ), one of the largest companies in Israel, Ami Erel has almost everything a CEO could want: A nice salary, power, respect, prestige - and an options package. But now that six months have passed since he took office, he has to start providing shareholders with the goods - a significant increase in Discount's market value.
The question is, how can this be done? Discount is a concern that covers many companies, fields and branches of industry: telephony, via Cellcom, retailing via Super-Sol (NYSE: SAE), real estate via Property & Building Corp (TASE: PTBL ), financing via the Albar leasing company and a lot of high-tech - both directly and via holdings in Elron Electronic Industries (Nasdaq: ELRN).
The company's great diversity poses a problem. On the one hand it is supposed to provide stability and low risk, but on the other, it makes it difficult to create added value. The capitalization of a company in the investment portfolio, such as the successful public offering of the Given Imaging miniature video camera manufacturer, cannot change the basic figures in the company's balance sheet. Even the capitalization of a medium-sized asset, such as sale of Newpan to other shareholders within the company, does not affect the numbers enough to alter Discount's share price.
One option open to Erel is to maintain the company's activities and those of its holdings and to wait for better days for the economy - and mainly for a wave of increases on the bourse. If and when there is renewed economic growth, Discount will be able to take full advantage of it and Erel will be able to reap the profits.
Erel's predecessor, Yoram Turbowicz, to a great extent followed this same strategy: He was passive on the whole, did not buy a lot of companies, and apart from Klil, did not sell any important assets either, even though he served as CEO during a period when he could have sold, issued stock, made mergers and capitalized profits.
Erel is in a different era. He would be quite happy to cash in on his successful investment in Cellcom, for example, but there seems to be no one on the horizon who would want to buy his shares. The purchase of more Cellcom shares from other partners is actually a more likely possibility. Other large holdings, such as Supersol or the financing and real estate companies, will perhaps continue to grow, but they will not serve as a springboard.
Tevel - a problematic holdingErel has, however, one big holding in Discount that is particularly problematic, and which is dragging the whole concern downward. This asset is such a big problem that the capital market has barely given it any value in the list of Discount's assets as a whole. If Erel were able to effect a recovery at this company, or at least to set it on an even keel, he would bring real value to Discount as well and there is no doubt that the capital market would reward the share accordingly.
Tevel is the cable television company in which Discount has a 49% stake. Tevel is suffering from losses, massive debts and hostility from analysts and the stock market. In the first nine months of 2001 Discount had to write off the massive sum of NIS 182 million for cable activities after Tevel itself ended that period with a shocking net loss of over half a billion shekels.
That is basically Discount's story, and previous CEO's also identified the problem. Turbowicz reached the CEO's chair mainly thanks to his past as anti-trust commissioner, slated to solve the regulatory problems that were plaguing Tevel.
The domineering CEO, Benny Einhorn, formerly the head of communications at Discount and currently the head of marketing at Comverse, also invested much effort in Tevel, working mainly as a lobbyist opposite Knesset members and government officials in an attempt to preserve Tevel's monopoly without having to pay any cash for it.
Tevel's woes began before Erel's tenure. They began a few years ago, when Turbowicz deepened Discount's involvement in the cable industry with a NIS 780-million investment in 35% of the Golden Channels cable TV company, even before receiving regulatory approval. A large share of Discount's losses in the last quarter of 2001 - NIS 218 million, come from a write-off stemming from that deal, because if Tevel does not get approval for a merger with Golden Channels, Discount will have to sell its holdings in the latter for much less than it paid.
Good news from the regulators
Erel apparently has more than a little luck, taking over at Discount's helm just as the cable companies' war with the regulator and the authorities ended - in a sweeping victory. The amendment to the Bezeq Law allows the merger of the cable companies in all matters concerning infrastructure and they will probably soon be able to merge their content too, perhaps with some restrictions.
The cable companies situation still doesn't look too rosy, but within a few months they will be a united company, they will have a license to market Internet services, their royalties to the state will be low, and if they want they can even compete with Bezeq for domestic telephony services.
Along with the good news from the regulator, the cable companies' business environment has also changed for the better. The cost of end user equipment and the modems used by subscribers is falling rapidly and the cable companies' biggest competitor, the Yes satellite broadcast company, is in financial trouble.
It is therefore no wonder that Erel has labelled Tevel as the company that will set the trend for Discount as a whole. Even if Tevel does become a success story in a year or two, however, there is no guarantee that Erel will be there to celebrate. The reason is quite simple: The whole future of IDB Holding Corp. is clouded by uncertainty regarding the concern's ultimate ownership structure.
Today it seems that the deal whereby Leon Recanati and Yossi Greenfeld will control IDB is already sealed, but only when the new owners take over in practice will it become clear how much of their new holdings the two will have to sell in order to pay back the massive loan they took from Bank Hapoalim, and only then will the real business policy of the concern be set, including the identity of the man who will lead the sales. All the indicators point to sales beginning with holdings in Elron, Albar and Maxima.
Even if he loses, Erel is not worriedErel is a manager who has proved that he knows how to advance quickly, quietly and smoothly. He has good chances of winning the expected struggle battle with Clal CEO Meir Shannie, over the helm of the united concern, despite the fact that he came to the group on the coattails of Oudi Recanati, who sold his shares and took the high road.
Even if Erel loses out, however, he has no cause for worry. In June 2001 he signed a three-year contract that stated that if he were to be fired he would be eligible for severance pay equal to all his wages till the end of the contract, including early exercise of his options.