This consideration reflects an economic value of NIS 2.5 billion for the subsidiary (before the money), while Allied Holdings was also given an option, for two and a half years, to purchase an additional 4.9% of the subsidiary’s share capital – at a value of NIS 2.8 billion, before the money. Assuming that the said option is fully exercised, then Allied Holdings will hold 9.56% of the share capital of Menora Mivtachim Pension and Provident at the end of the day.
A few words about the investor: Allied is a holding company, headed by Professor Yitzhak Suari, and although it is relatively “hidden to the tools”, its assets are valued at over five billion shekels (which is a conservative estimate), in many diverse areas – automotive, real estate, finance, infrastructure and more. , Because according to many the identity of the investor indicates the quality of the investment.
The rationale for the investor: When looking at the market value of the parent company, which stood at NIS 3.7 billion at the beginning of the day, it is hard not to wonder whether the price at which the investment in the subsidiary alone was made is not high? The answer, in our opinion, is “no” – in the knowledge. The last net profit of Menora Mivtachim Pension and Provident Fund (subsidiary) was NIS 146 million, which means that a company value of NIS 2.5 billion reflects a current return of almost 6% per year – at a low risk level, and without taking into account the potential for improvement.
So you say, as someone whose investment management is your area of expertise, can at this current level of interest rates be considered a low return ?! It seems to us that the opposite, for a low-risk investment, like that of a pension fund, is definitely a handsome return. Therefore, the confusion should not be about the price at which the transaction was made, it should be directed to the price at which the share of the parent company – Menora Mivtachim Holdings is currently traded.
Some numbers: The opening price of the Menora Mivtachim Holdings share reflected a value of NIS 3.7 billion for the entire parent company. According to the investment agreement, the value of the subsidiary – which coordinates the pension and provident fund activities – is estimated at only NIS 2.5 billion. If you look at the last annual report published by the company, that of 2019, you find that the subsidiary’s net profit amounted to NIS 146 million, while the parent company’s total profit was NIS 537 million – reflecting a return on capital of 13.4%.
Since there will be those who will claim that profitability in 2019 was high, we assumed a representative capital return of 9.5% for the entire company, and we tried to base the implied profit multiplier on the company’s other activities. How did we get to 9.5%? This is the average capital return that has been in the last decade, in the last three years, and also in the first nine months of 2020 the result was similar (9.1%). Hence, the short path to calculating the profit multiplier derived for the rest of the company’s activities (Menora Mivtachim Insurance, Shomera, Ampa, ERN) is short. What result was obtained? In our humble opinion unreasonable. The following is the calculation, in a nutshell:
Same conclusion, only in a slightly different show: We have no intention of now conducting a valuation for the company, but it is really simple to present the range derived from the transaction price. All that needs to be assumed is what is the appropriate multiplier for the balance of the company’s activities – those not included in the investment agreement. We know the normal net profit of those activities (NIS 420-430 million per year, as shown in the table above), so if you multiply it by the appropriate multiplier and add the economic value of Menora Mivtachim Pension and Insurance – as stipulated in the investment agreement (NIS 2.5 billion) – Arrive at an easy value for the entire holding insurance lamp. The following is a basic and trivial sensitivity analysis, in the following table:
The Bottom Line: The investment agreement with Allied Holdings flooded with a clear and well-known fact – the share of Menora Mivtachim Holdings is cheap, excessive and unreasonable.