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On tact

Or the lack thereof in one recommendation. And on tact's role in how Wall Street brings home the bacon

It's been a year since Doron Tsur left the chief analyst's chair at Gmul Sahar, but it was clear yesterday that his mark is still evident on the brokerage's analysts. They have no tact, don't know what to say, what not to say, and mostly, have no idea how to say things.

Three years after Tsur determined that Partner Communications (Nasdaq: PTNR) was worth about a quarter of the price at which its US underwriters planned to offer it on Wall Street, Gmul Sahar analyst David Yogev this week reported similar conclusions. "Investment in Partner is not worthwhile. The company is extremely leveraged which will make it difficult to compete." Gmul's recommendation for the share is "hold" ¿ analyst-speak for "We do not think much of this share. Ditch it the first chance you get."

Yogev's analysis of Partner focuses on something that was squished to marginal importance during Wall Street's euphoria: the balance sheet, that obscure document that details assets and liabilities. Yogev looked mostly at the left side of the sheet where Partner's debts swelled last year to NIS 3.2 billion. The company burns NIS 80 million per quarter and the transition to next generation technology will require heavy investment.

Yogev faced those numbers off against Partner's market cap, nearly NIS 5 billion, and the fact that the company has negative shareholder's equity, and came to the conclusion the share is pricey and investors would be better off looking for opportunities elsewhere.

So what's all the fuss? That is, after all, the analyst's job. Read the company's financial reports, examine the market situation, talk to management, estimate company value, and write what he thinks in a report.

Things are not so simple. Partner is one of Israel's biggest companies, controlled by very large concerns that carry tremendous weight in the Israeli economy. Yogev¿s tactless report is timed problematically, both for the company and for its shareholders.

CEO Amikam Cohen and the rest of the company's upper management are champions of the local media arena in the "business as usual" competition. The company is always racing aggressively and determinedly forward and never glances sideways. Which is how the latecomer to the Israeli cellular market got to where it threatens the number 2 player in less than three years.

But financial pressure in the company has increased in the past few months. Partner desperately needs a large sum of external capital to finance next generation technology and to keep growing. Without massive fundraising in the next year Partner could squander its admirable achievements of the past few years.

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Partner is quietly examining every option for raising cash: offering shares, issuing convertible bonds, and even shareholder investment. Yogev's report won't help Partner in negotiations with potential investors, banks, or even the shareholders themselves.

The shareholders are in a no less delicate situation. While the controlling shareholder, Hong Kong's Hutchison-Whampoa, is one of the only telecoms in the world with cash, the remaining minor shareholders are thirsting for a little bit of the stuff, hanging on for the moment when their Partner shares will be worth some money.

Polar Communications (TASE: PLRC ), controlled by Itschak Shrem, already started unloading Partner shares through the bourse recently and not for no apparent reason. Polar's portfolio is rich in companies offering write-offs and booking losses and the Partner investment is virtually the only place Polar can exercise a stake and post any gains.

Dankner Investment (TASE: DKNR ), which holds its Partner stake through Matav Cable Systems Media (Nasdaq: MATV), is one of Israel's most leveraged groups. In order to continue financing the losses in its cable television business and develop its other businesses, Dankner must convert some or all of its Partner shares into cash --- the sooner the better.

The IDB Group, which holds Partner through Elbit (Nasdaq: ELBT), is far less leveraged and far more stable. However, next month's deal in which Leon Recanati and Kardan take over, will make IDB into a concern looking to sell, turn companies into cash, and distribute that cash as dividends to repay the loans Recanati and Kardan will take to pay for the takeover. It wouldn't be at all surprising if one of the first companies in Recanati's sights is Partner.

Yogev's analysis of Partner's value could be accurate or not, the company has surprised everyone in the past, but it was written with no malice intended. Yogev's tactless recommendation lands on Partner and the shareholders with maddening timing, and Yogev and his bosses know full well that when those guys get mad, they have all the ways in the world to get even.

The likelihood we will soon see Gmul Sahar leading public offerings or major transactions for Partner or its shareholders is next to nil, if the brokerage doesn't "mend its ways". That is exactly why most brokerages take great care in issuing this sort of recommendation, especially when they smell a deal down the road.

Tactless analysts are endangered species on Wall Street. The Wall Street analyst's primary role is to recommend shares when there is an IPO, M&A or consulting deal in the works for his company, to give a lukewarm recommendation when the covered company is in dire straits or when there is no deal on which his employer could charge commission.

In Israel of all places there are a few investment banks and analysts who are not afraid to say what they think since they don't expect to do deals for the companies they cover. The problem with tactless analysis like Yogev's is that, brave as it is, it never brings home the bacon.