Tshuva, a true believer - TheStreet

When Yitzhak Tshuva's name comes up, Israelis' first association is with the Delek energy group. Only then do they recall smaller assets such as Green Venture Capital, Deltathree (Nasdaq:DDDC) and this and that real estate property.

But moves Tshuva's made in recent weeks show that the properties he's collected in Canada are big business, really big business. If the numbers quoted by investment banks are accurate, his Canadian real estate is worth no less than Delek. In fact, it may be worth far more.

Tshuva, formerly a humble building contractor, won Delek from Discount Investment Corporation in February 1998, in the biggest hostile takeover in Israeli history. The group engages in oil exploration, and the marketing and sale of fuel; in gas stations in the United States; in importing cars; in real estate; and in managing the local Starbucks chain. Its value on the market is around $550 million.

Tshuva owns 75% of Delek. At current valuations, without adding a control premium, his shares are worth around $412 million.

Tshuva, the true believer

"Former" contractor not really former: he has professional managers running Delek and Green, while he himself spends much of his time managing his real estate business. Real estate outside Israel, that is. He spends much of his time abroad, and even advised the Tel Aviv Stock Exchange that he plans to buy a private jet for his travels. That plan seems to have fallen through, for the nonce.

Tshuva has been building up his Canadian empire for a decade now, operating through a privately-held company, Elad. The company is managed by accountant Udi Erez. Elad buys office and residential buildings mainly in city centers.

Tshuva is a true believer in Canadian real estate. He thinks that the figures on supply and demand, and the cost of building there, assure profits. So far, he's been right. Like in other western cities, property prices have been soaring in cities such as Vancouver and Toronto.

Now Tshuva wants to step up his business a notch, and also to exit some of his investment. That requires an offering, and in recent weeks he's been holding talks with several investment bankers on floating the company.

Floating to true riches

There are several ways to float a real estate company, and Tshuva's checking them all. In talks with the Canadian outpost of HSBC, and with the president of HSBC North America, the Sino-British bank suggested offering the Canadian properties through Reit, a public fund that holds real estate and pays the unit owners annual returns from rent. It also gives them a chance at getting capital gains. The valuation HSBC suggests for the company is $600 million, which minus debt, assesses Tshuva's Canadian property firm at $400 million.

That is a lot of money, and insofar as is known, it's all Tshuva's. But the building contractor from Netanya doesn't think it's good enough. He thinks his properties are worth more than that, and is looking for better offers.

Before talking with HSBC, Tshuva had considered a bond offering, in Tel Aviv, based on his real estate in Israel. He thought to sell the bonds, which would probably have been indexed to the dollar, to institutional investors. His underwriters and advisers thought it could be done.

The offering was supposed to take place in chunks of tens of millions of dollars at a time. It required the services of the Maalot rating company, and Tshuva indeed contacted it to rate the real estate company and its potential bonds. But the Maalot economists played it very conservative in their estimation. After several weeks of work, they supplied a figure way below Tshuva's own estimation. Plans to offer bonds in Israel have been shelved.

When assessing a company that owns a long list of rental properties, and its potential to keep growing and generating more profits, the most significant figure is its capitalization rate. Any change of a percent in that figure completely changes the company's valuation. The difference between 6% to 8%, in Tshuva's case, is tens, maybe hundreds of millions of dollars in the value of the company.

Which is why Tshuva is still combing the industry for new financial entities while continuing to negotiate with the existing ones. If and when he decides to jump into the water, and make Elad a public company, whether through Reit or by taking on financing that would shift the risk to the banks Tshuva is likely to take home something between $150 million to $200 million, the biggest exit in his life. That exit alone is likely to be bigger than the entire profit he's made from his brilliant coup with the Delek group.