Exhibit (b)(5)
October 1998
VALUATION OF THE NUMBER OF SHARES
OF DISCOUNT INVESTMENT CORPORATION
WHICH WILL BE ISSUED TO IDB DEVELOPMENT CORPORATION LTD.
IN CONSIDERATION FOR 14,937,792 SHARES OF $1 PAR VALUE
OF PEC - ISRAEL ECONOMIC CORPORATION
Itzhak Swary Uri Cohen
Itzhak Swary Ltd.
Itzhak Swary Ltd.
Financial Consulting
- --------------------------------------------------------------------------------
Messrs:
IDB Development Corporation Ltd. Discount Investments Corporation Ltd.
3 Daniel Frisch Street 14 Bet Hashoeva Lane,
Tel Aviv. Tel Aviv.
Dear Sirs:
Re:Valuation dated October 15, 1998 of the number of shares of Discount
Investment Corporation Ltd. ("Discount Investments") which will be issued to
IDB Development Corporation Ltd. ("IDB Development") in consideration
for 14,937,792 shares of $1 par value of PEC Economic Corporation ("PEC")
We were requested by you to evaluate the number of shares of Discount
Investments which will be issued to IDB Development in consideration for
14,937,792 common shares of $1 par value of PEC, which comprise some 81.4% of
the rights in that company (hereinafter: "The Exchange Ratio"). The suitable
Exchange Ratio is determined as a function of the ratio of the net assets value
of Discount Investments to the net assets value of PEC.
In our opinion, in view of the data we received and the checks we carried out,
the fair and reasonable exchange ratio between the shares of PEC which will be
transferred to Discount Investments and the shares of Discount Investments which
will be issued in consideration therefor are as follows:
In consideration for 14,937,792 common shares of $1 par value of PEC, 17,390,593
shares of NIS 1 par value of Discount Investments should be issued to IDB
Development, which expresses a ratio of 1.1642 common shares of NIS 1 par value
of Discount Investments in consideration for a share of $1 par value of PEC.
This exchange ratio was determined based on an average ratio of 1.327 between
the net assets value of Discount Investments and the net assets value of PEC.
It should be mentioned that the investments portfolio of the two companies is
similar in composition, and that about 80% of the value of the companies is
derived from identical investments in over 40 companies. In addition IDB
Development holds some 54.3% of the shares of Discount Investments prior to the
transaction, and therefore is situated on "both sides of the fence" in the
exchange transaction. As a result, according to simulations we carried out, the
exchange ratio has a low sensitivity to changes within reasonable ranges (+/-
25%) of the valuations of the companies.
We wish to emphasize that in view of the legal limitations connected with the
possibility of a public issue in the U.S. of Cellcom Israel Ltd. ("Cellcom"),
whose shares are held among other things by Discount Investments and PEC, we
were requested by you to determine an exchange ratio taking into account a
general indication of the value of Cellcom. The indication will be based on the
comparison of market prices and multipliers of similar European cellular
companies, taking into account a discount resulting from the lack of
marketability and liquidity of an investment in Cellcom as compared with the
comparative group. We should state that the investments of the companies in
Cellcom are significant to their economic value, but have little effect on the
exchange rates due to identical holdings in that company. We emphasize that in
view of your said directive, we did not carry out an evaluation and we did not
apply any other procedures regarding this investment.
We should mention that a deviation of +/- 25% in the value of Cellcom will
result in a ratio of about 1.318 - 1.339 between the net assets value of
Discount Investments and the net assets value of PEC, and the number of shares
of Discount Investments to be issued to IDB Development resulting from the
amended range will stand at 17,522,056 - 17,246,417 shares (a variance of +/-
0.8% of the number of
shares stated in the exchange ratio valuation). As in our estimate the
indication calculated by us and the range of the variation checked, reflect a
reasonable range of the economic value of Cellcom, and as a change in the
estimated value in the range stated does not result in a significant variance in
the results of valuation of the exchange ratio, in our opinion this limitation
does not detrimentally affect the reasonability and validity of the valuation of
the exchange ratio.
Determining a fair exchange ratio is based on the valuation of the value of
portfolio investments of the two companies less the value of their net financial
liabilities, taking into account tax effects which apply on profits from the
realization of the investments. For the purpose of valuing the exchange ratio we
based ourselves on the draft and immediate statements of IDB Development dated
October 1, 1998 which relates to the said transaction, the periodic reports and
audited financial reports, the interim financial reports and the prospectuses
which were published by Discount Investments, PEC and the principal companies
included in their investment portfolios. Moreover, we based ourselves on
additional data and clarification received from the managements of Discount
Investments and PEC, including regarding significant companies included in their
investment portfolios, on discussions with senior management members of Discount
Investments and PEC and on data available to the public and the views published
about the companies and the branches in which they operate. In addition we acted
according to your directives regarding the treatment of the investment in
Cellcom in view of the legal limitations mentioned.
We relied on sources which seemed to us trustworthy. Nothing came to our
knowledge which should reflect on the lack of reasonability of the data we used.
We did not check the data independently and therefore our work is not a
verification of the correctness, completeness and exactness of this data.
The valuation of a suitable exchange ratio is aimed at determining the number of
shares of Discount Investments which will be issued to IDB Development only, and
relates to the totality of elements connected with the valuation of the exchange
ratio only, does not discuss other aspects of the transaction, and is in no way
a recommendation to any shareholder regarding the way he should vote in the
proposed exchange transaction. The valuation of the exchange ratio is not a
valuation of the value of the assets or of the share capital of Discount
Investments or PEC.
An economic valuation should reflect in a reasonable and fair manner a given
situation at a certain time, on the basis on known data while relating to basic
assumptions and forecasts which were made on the basis of this information.
The valuation of a published exchange ratio at the time in which there are
fluctuations in the capital and financial markets in the world and in Israel,
which are affected by real and monetary influences and there is a possibility
also of overreactions of the investing public to these influences. For the
purpose of differentiating between the long-term effects and the
overreactions which in their nature are transitory, requires among other
things, a reexamination in view of the perspective of time. On the other hand
despite these difficulties there is the low sensitivity of the exchange ratio
to changes within reasonable ranges in the valuation of the companies as
mentioned above.
We agree, that this Opinion will be included and/or mentioned in the Immediate
Amended Report to be published with regard to this exchange transaction. We wish
to state, that we have no personal interest in the shares of IDB Development,
Discount Investments or PEC.
In addition we would like to state, that in the context of our engagement with
you to carry out the valuation of the exchange ratio, we have been given an
indemnity, according to which, should be sued to pay any amount to a third party
in a legal procedure for any grounds which are liable to stem, directly or
indirectly, from this Opinion, you will indemnify us for reasonable expenses
which we will incur or be required to pay for representation, legal counseling,
professional fees, defense against legal proceedings, negotiations etc., and you
will also indemnify us for any amount
which we will be obliged to pay in legal proceeding, to a third party, which
exceeds $1.5 million. There will be no obligation to pay indemnity if it is
determined that we acted, with regard to this opinion, with serious negligence
or malice.
Our Opinion follows.
Yours sincerely,
( - ) ( - )
Date: ------------ ---------
October 15, 1998 Itzhak Swary Uri Cohen
CONTENTS
Page
----
1. Background and Summary of Valuation of the Exchange Ratio
a. Background 1
b. Summary of valuation of the exchange ratio 2 - 3
c. Relationship between exchange ratio and the value of
the companies according to the prices of their shares
on the Stock Exchange. 4 - 5
2. Methodology
a. General 8
b. Considerations when valuing of the net assets value
of Discount Investments and the net assets value of PEC 8-
c. Tax aspects 8 - 12
d. Calculating the number of shares of Discount Investments
which should be issued to IDB Development based on the
net assets value ratio 12
3. Details of the valuation of certain companies held by Discount Investments
and/or PEC whose value has a significant effect on the valuation of the
exchange ratio.
a. Property and Building Company Ltd. 13 - 26
b. Supersol Ltd. 27 - 43
c. Elron Electronic Industries Ltd. 44 - 54
d. Ilanot Batucha Investment House Ltd. 55 - 61
e. General indication of the range of values of
Cellcom (Israel) Ltd. which is not an evaluation 62 - 64
Appendices
1. Calculation of the number of shares of Discount Investments which should be
issued to IDB Development in consideration for the shares of PEC at its
disposal.
2. Comparison of the level of marketability of the shares of Discount
Investments and PEC and the development of value ratio of Discount
Investments to the value of PEC according to their share prices on the Stock
Exchange.
3. Opinion of the assessor Mr. Alfred Irani.
1. Background and Summary of the Valuation of the Exchange Ratio(1)
a. Background
IDB Development holds about 54.3% of the share capital of
Discount Investments, a company whose shares are listed for
trading on the Tel-Aviv Stock Exchange (hereinafter: "The Stock
Exchange") and about 81.4% of the share capital of PEC, a company
incorporated in the State of Maine in the United States ((whose
shares are listed for trading on the New York Stock Exchange
(hereinafter: "NYSE")). It is the intention of IDB Development
and Discount Investments to merge PEC with Discount Investments
by way of an exchange of holdings of IDB Development in PEC with
shares of Discount Investments which will be issued to IDB
Development, and the acquisition of the shares of the minority in
PEC in cash. After completing the transactions, PEC will become a
wholly owned subsidiary of Discount Investments, and its shares
will be delisted from trading on the NYSE. The transactions are
not interdependent, and their implementation is subject to the
mechanisms of negotiation and approval, as detailed in the
Immediate Report in which this evaluation is included.
The acquisition of the shares of the minority in PEC will be
financed by Discount Investments, and will be carried out according
to a procedure called in the U. S. - a Reverse Subsidiary Merger.
According to this procedure, IDB Development will set up a wholly
owned subsidiary(2), where Discount Investments will arrange to put
the financial resources required to pay for the shares of the
minority in PEC at PEC's disposal and will merge with PEC. As a
result of the merger, this Company will cease to exist, and the
minority shareholders in PEC will receive cash in consideration for
their shares which will be acquired by PEC(3). On September 7, 1998
IDB Development published a cash purchase offer for the shares of
the minority in PEC at a share price of $25.50, based on the
valuation of the Company of some 468 million dollars. The final
price is subject to negotiations with the Committee of the Board of
Directors of PEC, which is independent of IDB Development.
In view of the intention of the parties, as described above, we have
been requested to value the number of Discount Investments' shares
of NIS 1 par value, which should be issued to IDB Development in
consideration for 14,937,792 shares of $ 1 par value of PEC, which
comprise some 81.4% of the rights in PEC.
- ----------
(1) All the financial data in this work are expressed in NIS of June 1998,
unless specifically stated otherwise. The data on market values is based
on the rates of the shares on the Stock Exchange in current terms.
(2) In the event that the exchange of the holdings of IDB Development in PEC
for shares of Discount Investments will be prior to the acquisition of the
shares of the minority, IDB Development will transfer to Discount
Investments its holdings in the subsidiary which will be set up for the
purpose of acquiring the shares of the minority in PEC, without
consideration.
(3) In the event that the exchange of the holdings of IDB Development in PEC
for shares of Discount Investments will not be carried out by the end of a
year from the date of acquisition of the shares in the minority, IDB
Development will see that the subsidiary will repay the loan, at market
conditions.
1
b. Summary of the valuation of the exchange ratio
In our opinion, in view of the data we have received and the checks
we performed, the suitable exchange ratio between the shares of PEC
which will be transferred to Discount Investments and the shares of
Discount Investments which will be issued in consideration for them
is as follows:
In consideration for 14,937,792 shares of $1 par value of PEC,
17,390,593 shares of NIS 1 par value shares of Discount Investments
should be issued to IDB Development.
The exchange ratio is fixed at a ratio of 1.327 between the net
assets value of Discount Investments and the net assets value of
PEC.
It should be mentioned, that as about 80% of the investment
portfolio of the two companies is absolutely identical, and as about
54.3% of the shares of Discount Investments are held by IDB
Development prior to the transaction (so that IDB Development is
found on "both sides of the fence" in the exchanged transaction),
significant changes in the value of most of the companies included
in the portfolio, affect only slightly the exchange ratio. On the
other hand, joint investments at equal rates between the companies
have a greater effect on the ratio.
We wish to emphasize, that in view of the legal limitations connected with
the possibility of a public issue in the Unites States of Cellcom Company,
whose shares are held, among others, by Discount Investments and PEC, we
were requested by you to determine the exchange ratio taking into account
general indication regarding the range of the values of Cellcom. The
indication will be based on a comparison of market prices and multipliers
of similar European cellular companies, taking into consideration the
discount resulting from the lack of marketability and liquidity of the
investment in Cellcom as compared with the comparative group. We should
state, that the companies' investments in Cellcom are significant to their
economic value, however that have little effect on the exchange ratio due
to identical holdings in Cellcom. We should emphasize that in view of your
instructions, we did not carry out an evaluation and we did not apply any
other procedures with regard to this investment.
We state that a variance of +/-25% in the value of Cellcom will result in
obtaining a ratio of about 1.318 - 1.339 between the net assets value of
Discount Investments and the nets asset value of PEC, and the number of
shares of Discount Investments which will be issued to IDB Development,
resulting from the amended range, will be some 17,522,056 - 17,246,417
shares (a variance of +/- 8% of the number of shares which were determined
in the valuation of the exchange ratio). As in our estimate, the
indication calculated by us and the range of variance examined, reflect a
reasonable range of the economic value of Cellcom, and as a change in the
estimated value within the range stated, does not result in a significant
variance in the results of the valuation of the exchange ratio, in our
opinions this limitation does not harm the reasonability and validity of
the valuation of the exchange ratio.
2
The calculation of the number of shares of Discount Investments, which
should be issued to IDB Development in consideration for the shares of PEC
at its disposal, is attached as Appendix 1 to this Opinion.
The valuation of the suitable exchange ratio is based on the valuation of
the net assets value (NAV) of Discount Investments and PEC, i.e. an
evaluation of the value of the investments portfolio and other assets of
the two companies, less financial liabilities, and taking into account the
tax effect which will apply to profits from realizing the investments.
Details of the net assets value of Discount Investments and PEC, according
to affiliated companies whose value has a significant effect on the
exchange ratio determined(4), is included in a table on Page 6.
c. The connection between the exchange ratio and the value of the companies
according to the price of their shares on the Stock Exchanges.
The net assets value used as a basis to determine the exchange ratio is
not necessarily identical to the economic value of the share capital of
Discount Investments and PEC.
Both Discount Investments and PEC are holding companies. Researches
carried out showed, that in many cases, the value of holding companies is
lower than their net assets value(5), among other things for the following
reasons:
- The lack of flexibility of the investor when choosing investments
and regarding the timing of investments and their realization, as
compared with direct investments in the basic assets of the holding
company;
- The lack of business focus of the holding company;
- The non optimal investment of management's time, which may be
expressed on the one hand, in superfluous investment for negligible
investments, and on the other hand neglecting small investments,
which may, on an accumulated basis, be a significant part of the
investments portfolio;
- The lack of sufficient information regarding the basic assets of the
holding company;
- The cost of maintaining the holding company's central management.
We should state, that in the researches some advantages are also presented
when investing in an investment company, such as access to investments as
well as other reasons. Nevertheless, there is wide agreement that the
disadvantages significantly exceed the advantages, and for this there
exists numerous empirical proof. Today, holding companies tend to
implement procedures of business focusing, apart from exceptions such
as the GE Corporation.
These reasons, and experience in a large number of holding companies and
closed end finds, require a check whether the economic value of the two
companies is lower than their net assets value. Thus, for example, the
value of Discount
- ----------
(4) In the context of the group of other companies, companies were included in
which a change of +/- 25% in their economic value compared to the value
taken into account in the exchange ratio valuation, will result in a
change of less than about 0.5% in the consideration to IDB Development.
(5) This characteristic is called "Discount of Holding Companies".
3
Investments' share capital, as calculated based on the average price of
the share in the Stock Exchange in the period 9/8- 10/8/1998, is lower by
some 27% than the net assets value of this company according to this
valuation(6). Discount differences can be observed similarly in other
holding companies traded on the Stock Exchange.
It should be emphasized that investors among the public in the shares of
PEC, immediately prior to the exchange transaction, are exposed to
additional characteristics, which may reduce the value of the shares of
PEC held by them as compared with its net assets value, including low
marketability and liquidity, limitations on the methods of investment
applied to the Company as a foreign investment company as a result of
American law (which will be removed as a result of the transaction)(7),
the country risk (which is relevant to American investors in the
Company most of whose assets have the Israeli risk), taxation imposed
on the investment of Israeli investors in this Company and more.
These additional characteristics are likely to explain an additional
gap between the price of PEC's share when traded on the Stock Exchange,
and between the value of PEC calculated on the net assets value taking
into account the above mentioned discount, which does not include an
indication of exposures which are special for investors among the minority
in PEC. In other words, the discount expressed in a comparison of market
price to net assets values in PEC, as calculated by us, is higher than the
equivalent data in the shares of Discount Investments.
In our opinion, the factors we mentioned above, which may reduce the value
of the share capital as compared with the net assets value of the holding
company, should not affect the value of the exchange ratio, and this
because the character of the transaction is one of a merger transaction.
The nature of the transaction is a combination of investment portfolios of
the two companies (of which about 80% of their investments are absolutely
identical in both companies) to jointly manage in one framework, and
therefore the ratio of the net assets value expresses the contribution of
each party to the joint portfolio on the "day after the transaction",
without the need for further adjustments.
As described in the immediate report, IDB Development on September 7, 1998
approached the Board of Directors of PEC with an offer to purchase all the
PEC's shares held by the public in consideration for 25.50 U.S. dollars
per share in cash. The final price of purchase offer will be determined in
negotiations between a Special Committee of the Board of Directors of PEC,
which is independent of IDB Development, and between IDB Development, and
is subject to the right of the shareholders who will appeal to the Court
with a request to determine a fair price for the purchase of their shares.
- ----------
(6) This discount is liable to be affected due to the reasons mentioned, and
the differences in the net assets value (mainly differences in evaluating
the basic assets and/or the tax influence), including difference in
valuing Cellcom, in view of the fact that the investment in this company
was not valued by us but was included in the valuation based on general
indications of its value.
(7) We were told that the Investment Company Act (1940) stipulates, among
other things, special approval procedures and imposes obligations of
disclosure and reporting on transactions with companies held by the
investment company. Soon after the Law was legislated, PEC received an
approval that it is not subject to the Law, as long as most of the
investments portfolio of PEC will be invested in companies in which PEC
and the companies connected with it have a holding exceeding 25%, and
where PEC and the companies connected with it participate in their
management.
4
The purchase offer price is, from the point of view the shareholders being
offered, close to and an amendment of the market price of PEC's shares, as
the only alternative at their disposal for the purchase offer price is the
sale of shares on the market. As the purchase offer price, to be
determined, is also affected by the factors we mentioned above, in our
opinion there is no need for additional adjustments to the net assets
value ratio as a result of the purchase offer.
The following is a description of the methodology and main points of the
financial analysis used in determining the exchange ratio. The following
description does not claim to be a full and detailed description of all
the procedures we applied, but relates to the main ones, and does not
constitute a full detailed description of Discount Investments, PEC, the
companies whose shares are held by them and their business environments.
5
Structure of holdings and net assets of Discount Investments and PEC
(NIS millions)
------------------------
-------------- ---------------------- Surplus Holding of
Joint Holdings Surplus Holding of PEC Discount Investments
Name of Average value -------------- ---------------------- --------------------
Company of Company Rate Value Rate Value Rate Value
------- ---------- ---- ----- ---- ----- ---- -----
Properties and Building 1,781.0 14.89% 265.2 26.18% 466.3 - - See Clause 3.a
Cellcom * 7,476.0 12.50% 934.5 - - - - See Clause 3.e
Suipersol 2,310.0 17.60% 406.6 - - 4.72% 109.0 See Clause 3.b
Iron 1,308.0 13.51% 176.7 - - 32.77% 167.0 See Clause 3.c
Ilanot Batucha 212.5 - - 50.00% 106.3 See Clause 3.d
Others*** - 413.7
-------
1,279.8 205.3 796.0
------- ------- 499.0
-------
Other assets, net 3,062.8 67.0 1,295.0
======= ------- =======
-------------- 738.6
=======
The net assets value before provision for taxes 3,801.4 4,357.8
Provision for tax on the investments rates (807.6) (383.8)
------- -------
Net assets value ** 2,993.7 3,974.0
======= =======
Rate of identical joint holdings from the total investments value 82% 79%
----------------------- -------------------------
------------------------------------------------------------------------
Net assets value ratio: 1.327
-------------------------------------------------------------------------
IDB Develoment's holdings in Discount Investments after the merger: 73.7%
-------------------------------------------------------------------------
* Indications of the value of the Company does not constitute an economic
evaluation, in view of the customer's instructions when ordering the work.
**As we have stated, the net basic value is not necessarily identical to the
value of the share capital of the companies
--------------------
-------------- ---------------------- Surplus Holding of
***Others Joint Holdings Surplus Holding of PEC Discount Investments Main valuation method
- --------- Average value -------------- ---------------------- -------------------- ---------------------
of Company Rate Value Rate Value Rate Value
---------- ---- ----- ---- ----- ---- -----
Tevel 1,285.0 23.73% 304.9 - - 0.97% 12.5 Discounted cash flows
El-Yam 1,966.0 10.10% 198.6 - - 4.23% 83.2 Net assets value
Tambour 422.0 42.31% 178.5 1.02% 4.3 Transaction, market value
Others 597.8 201.0 318.0
----- ----- -----
1279.8 205.3 413.7
====== ===== =====
-------------- -------------------- -----------------
6
2. Methodology
a. General
Calculation of the number of shares of Discount Investments which
should be issued to IDB Development in consideration for the shares
of PEC held by it, was done in two stages:
o Calculation of the ratio of the net assets value of Discount
Investments to the net assets value of PEC;
o Calculation of the number of shares which should be issued to
IDB Development, based on the aforementioned ratio.
The following are the main considerations which guided us in
choosing the methodology for the first stage of the work, and
details of the method of calculation of the number of shares that
will be issued, which is mainly a technical stage.
b. Considerations when estimating the ratio of the net assets value of
Discount Investments and the net assets value of PEC
1) Relying on the Stock Exchange prices is not suitable in the
present case
In theory, the natural starting point in valuing a suitable
exchange ratio is the share price in various markets, in view
of the fact that the shares of both companies are traded, and
as some 80% of the investment portfolios of the companies are
identical.
The problem is, that in the present case the ratio of the
market value of the share capital cannot be used as a basis
for the valuation for the following main reasons:
o A basic condition for using the prices of shares in
trading as an expression of economic value, is the level
of their trading. In the present case, significant
differences exist in the level of trading of the shares.
From the beginning of 1998, the average daily turnover
of Discount Investments' shares on the Stock Exchange
exceeded one million dollar, while the average daily
turnover of PEC's shares on the NYSE totaled about
0.2-0.3 million dollars only. An additional expression
in differences in the marketability of shares is the
high fluctuation in the development of the value ratio
of the companies according to the price of their shares
in the Stock Exchange.
Comparison of the level of marketability of the shares
of Discount Investments and PEC and a graph of the
development of the proportional ratio according to the
prices of the shares on the stock exchange are attached
as Appendix No. 2. We should state that the exchange
ratio determined in the evaluation is significantly
different to the exchange ratio according to share
prices on the stock exchange.
7
o As Discount Investments is traded on the Tel Aviv Stock
Exchange while PEC is traded in the U.S., there are different
aspects which affect the value of the shares in the market
which are not relevant to the valuation of the exchange ratio
as they will not affect the merged company after the
transaction.
The principal additional aspects are:
o The effects of differential economic developments in the
economies of the U.S. and Israel on the behavior of the
capital markets.
o PEC is a company most of whose assets are located in
Israel, and therefore American investors who cost the
shares are liable to take the country risk into account
including the currency risk as an additional risk which
is likely to reduce the value as compared to the
relationship of Israeli investors who are the main
investors in Discount Investments;
o As we were told, PEC is exposed to limitations of the
investment possibilities of foreign investment companies
under American law. The merged company will not be
exposed to these limitations after the transaction.
o Possible differences in the costs of the transaction
between the stock exchange (such as the spread of the
purchase and sale, commissions, the effective cost is
different with the limitations of timing transactions
which result from differences in marketability and
liquidity between those shares).
o Additional factors which are liable to affect share prices on
the stock exchange which do not necessarily affect the
exchange ratio are:
o Different levels of control of the controlling
shareholders in the companies and the different level of
protection given by the American law and the Israeli law
to minorities in the Company. This factor too, should
not affect the exchange ratio, as after the transaction
Discount Investments will remain the only traded
company.
o The different level of management costs which are
affected among other things by the arrangement for
giving services between the companies, and the
differences of the cost of keeping staff in Israel and
in the U.S. As a result of the transaction, the two
investment portfolios will be merged and will be managed
jointly under one management, so there is no place to
consider the differences in management costs under the
previous management set-up when determining the exchange
ratio.
o A minority investor in PEC is passive and lacks any
access to the basic assets of the Company, while in the
merger procedure basic assets are examined in substance
due to the nature of this transaction
8
2) Calculation of the exchange ratio on the basis of an
evaluation of the net assets values of the companies
As in our opinion one cannot rely on the exchange ratios of
the companies based on their share price on the stock
exchange, the exchange ratio has been determined based on the
net assets value of the companies calculated as follows:
o We estimated the value of every investment in the
investment portfolios of Discount Investments and PEC.
The methodology of the evaluation of every investment
was chosen on an item by item basis. Based on the
following principal considerations:
o In those companies where there is a market
price the ability to rely on the market price
was checked in view of the level of trading of
marketability of the share and checking the
companies value according to operative and
financial data;
o Adjusting the method in view of the
characteristics of the operations and in view of
checking the operative and financial data of the
Company in the background of the business
environment.
o Sensitivity of the exchange ratio to the value of
the Company. In the case where a change in the
value of the company being valued is likely to
cause a significant change in the exchange ratio
determined, the value of the investment was
checked by using additional/other methods on the
market price also with regard to marketable
investments.
o In those cases where a range of values was
calculated for the company, an average was taken
into account for the purpose of calculating the
exchange ratio.
o As we mentioned, in view of your instructions and
the legal limitations, we did not carry out a
valuation of Cellcom Ltd., which is included in
the investment portfolio of both companies. The
value of the investment in Cellcom was included
using a valuation based on general indications of
its value, as detailed below. As we stated, a
variance of +/-25% in the economic value of
Cellcom causes a variance of +/-0.8% in the number
of shares of Discount Investments to be issued to
IDB Development. As in our opinion, the
indications calculated by us and the field of
variance checked reflect a reasonable field for
the economic value of Cellcom, and as this
variance is not a significant variance in the
results of the exchange ratio valuation, in our
opinion this limitation does not harm the
reasonability and validity of the valuation of the
exchange ratio.
Details of the methodology and the evaluation of companies
whose value has significant effect on the exchange ratio is
included in chapter 3 below.
o Based on the value of every investment we
calculated the tax effect which will apply on
capital gains from its realization, taking into
account the data we received from Discount
Investments and PEC regarding the tax base of the
investments; the tax status as given us by the
managements of Discount Investments and PEC,
taking into account the tax laws of Israel and the
U.S., and the exchanges expected in the tax laws
in Israel which are in advanced stages of
legislation, and taking into account the estimated
effects of delaying the realization of the
effective tax liability.
o In order to receive the net assets value of every
company, we added to the value of the investment
portfolio (after an estimate of the tax effects)
additional assets (mainly financial assets) owned
by the companies and we deducted their financial
liabilities based on the balance sheet of June 30,
1998.
c. Tax Aspects
1) General
The economic value of the companies included in the investment
portfolio of Discount Investments and/or PEC expresses, among
other things, the tax liability on their taxable revenues in
the future, including capital gains and land betterment tax,
whichever relevant.
Therefore, this value relates to a direct investment in the
shares of these companies, whose cost is used as the basis for
calculating capital gains in the future. In the case before
us, as this relates to the value of an investment portfolio
owned by holding companies, the tax basis of the investment is
liable to be different from their economic value, and
therefore Discount Investments and PEC are likely to be liable
for capital gains tax in the event that they realize the
holdings in their companies valued.
The effective tax liability is conditional, among other
things, on the following factors:
o Profit for tax purposes which is determined by the
difference between the economic value of the investment
and their cost, taking into account the specific
provision determined in the tax laws regarding the
method of adjusting the investment, deductions and
setoffs allowed, etc.
o Statutory tax rate
o Timing of the realization. The later the realization,
the lower the present value of the tax liability.
o The ability to setoff losses and transferable deductions
from taxable profits
o The existence of profits suitable for distribution.
o The ability to initiate the distribution of dividends
prior to the realization of the holdings in the
companies
There are significant differences between Discount Investments
and PEC with regard to the tax status of the various
investments, and therefore a different relationship is
required to calculate the tax provision when realizating the
investment, as detailed below.
2) A description of the main differences in the tax status of
Discount Investments and PEC
The following is a summarized description of the tax status of
Discount Investments and PEC. The following description is
meant only to give an understanding in handling the tax
aspects when valuing the exchange ratio, and is not a full and
detailed description of the tax status of the companies and
their investments in the various companies.
Discount Investments is a company resident in Israel and
assessed under Israeli tax laws.
The tax liability from realizing investments in Israel is
subject to the tax status of the investments:
o Realization of holdings in private companies (such as
Cellcom, Tevel, Albar, etc.) is taxed according to the
provisions of section E of the Income Tax Ordinance
(hereinafter: "The Ordinance"), according to which the
Company is liable to tax at a rate of 10% on
inflationary profits accumulated up to December 31, 1993
and on its share in the amount of profits suitable for
distribution ("the additional inflationary amount") of
the company sold as defined in the Ordinance. The
inflationary profits accumulated between December 31,
1993 and the date of realization are tax exempt. Capital
gains exceeding the inflationary amounts as mentioned,
is liable to tax at a rate of 36%.
o The realization of holdings in companies whose shares
are traded on the stock exchange is taxed as follows:
o Companies in which the Income Tax Law (Adjustments
for Inflation) (hereinafter: "The Adjustments
Law") does not apply to them(1) are tax exempt on
gains from securities, similar to the tax status
of an individual. According to the proposed law,
which is in advanced stages of legislation,
companies which are not directly owned by private
shareholders will not be able to choose this tax
status in the future, and therefore the
Adjustments Law will apply to them.
o Companies to whom Adjustments Law applies, are
liable to a tax at a rate of 36% of the real
profit from the realization of the marketable
securities according to two main tracks:
o Profit from the realization of "controlling
shares" as defined in the Adjustments Law
(such as profits from the realization of the
shares of Properties and Buildings, Klil),
are tax exempt, excluding accumulated
profits during the year of sale (the basis
for the tax debit is the price of the share
on the stock exchange at the end of the year
prior to the year of the sale). According to
the proposed law, which is in advanced
stages of legislation, the status of
controlling shares will be canceled
retroactive from 1.1.99, and the same law
will apply to them as applies to other
marketable shares.
o Real profit from the realization of other
marketable shares is liable to tax at a rate
of 36%.
- ----------
(1) Companies without "revenues from business", which did not claim finance
expenses for tax purposes, and which chose this tax status.
There are provisions in other laws according to which Discount
Investments is likely to reduce its tax liability, such as the
exemption of profits from the realization of marketable shares of an
"industrial company" pursuant to the provisions of the Law for the
Encouragement of Industry (Taxes).
Revenues from dividends received from affiliated companies are
exempt in principle from tax. Dividend from profits of "an approved
enterprise" as defined in the Law for the Encouragement of Capital
Investments, is liable to tax at a reduced rate, unless the dividend
was concatenated by the recipient company. The rate of tax is
subject to the benefits track chosen by the company which owns the
approved enterprise and the structure of its ownership.
In view of the tax status as described above, the provision for tax
on the profit included in the difference between the valuation of
the investment and the adjusted costs, has been calculated for tax
purposes on June 30, 1998 as follows:
o The effective tax rate of 25% has been taken into account as
compared with the statuary tax rate of 36%. This, in order to
express the present value of the future tax liability and the
possibility to reduce effective tax by the distribution of
dividends.
o In holdings and investments companies (Properties and
Buildings, Elron, R.D.C.) for which the tax liability was
taken into account for the realization of the investments in
the context of the valuation of the investee companies, an
additional provision of 7.5% was taken into account in order
to express the additional potential tax liability in the
event of realizing the shares of the holding and investment
company.
o In those cases where the economic value of the investment in
marketable shares with the status of "controlling shares" or
the status of tax exemption, exceeds their market value, the
provisions for taxes was calculated at the above rates on the
surplus of the economic value over the market value, in view
of the changes expected in the tax laws in Israel.
PEC is an American company which is assessed according to American
laws and is liable to Federal tax at a rate of 35% on all its
taxable income, including capital gains and dividends from
investments in Israeli resident companies which comprise most of the
investment portfolio of PEC. In general PEC is not liable to local
tax (government tax and municipal taxes) on its revenues from
investments in Israel. The tax base for calculating capital gains is
the nominal dollar cost of the investment.
In those cases where, according to Israeli law and the provisions of
the Israeli-U.S. Treaty for the Prevention of Double Taxation, PEC
is liable to capital gains in Israel, and can use the tax paid as a
deduction against its tax liability in the U.S. In practical terms,
usually the tax liability in the U.S. is greater than the tax paid
in Israel, mainly due to the tax basis for taxation purposes in the
U.S. (calculation of costs in terms of nominal dollars) is lower
than the tax basis in Israel (a cost adjusted to the consumer price
index in Israel).
The tax laws in the U.S. permit a choice, under certain conditions
and limitations, between a deduction of the tax paid by PEC abroad
against the tax liability in the U.S., and receiving a credit for
the tax paid abroad by PEC or the tax paid by companies held by it,
before the payment of the dividend to PEC. The choice between the
two alternatives is with regard to all the taxes paid abroad during
the tax year. A choice of receiving the credit is liable to reduce,
to some extent, the tax liability on dividends, as compared with the
statuary tax rate of 35%.
In view of the tax status, as described above, PEC's ability to
reduce the effective tax liability is reduced considerably as
compared with Discount Investments. Therefore, we calculated the tax
provision on the income included in the difference between the
valuation of the investment and the dollar cost for tax purposes as
at June 30, 1998 as follows:
o An effective tax rate of 33% was taken into account, as
compared with the statuary tax rate in the U.S. of 35%;
o An additional provision for the possibility to realize
holdings in holdings and investment companies (Properties and
Buildings, Elron, R.D.C.) was calculated using a tax rate of
15%.
It should be mentioned that after the exchange transaction and the
purchase of the public shares in PEC, a reorganization is planned
according to which all the holdings in PEC and Discount Investments
in listed affiliated companies will be concentrated in the context
of a joint holding company. This reorganization is likely to enable
the reduction of the tax liability of the Group in the U.S. for its
listed investments under certain conditions and limitations. The
possible effect of this reorganization in the reduction of PEC's tax
liability has not been taken into account in the framework of the
valuation, mainly for the following reasons:
o The implementation of the reorganization is subject to
arrangements and agreements with the tax authorities in Israel
and the U.S., whose character and details have not yet been
finalized or approved, and therefore they are uncertain.
o Receiving tax benefits is subject to the joint holding company
not selling the holdings in the shares of the companies
transferred to it for a period of 5 years from the date of the
transfer. The sale of the holdings during this period will
cancel the tax benefits with regard to the holdings sold.
o Details of the reorganization, including the identity of the
holdings which will be concentrated in a joint company have
not yet been decided, and therefore there is uncertainty
regarding the identity of the investments which will be
entitled to the conditional tax benefits.
o Finally, even after the planned reorganization, PEC will be
fully taxed on realization of shares in the joint holding
company, or the receipt of dividends from it.
d. Calculation of the number of shares of Discount Investments which
should be issued to IDB Development based on the ratio of the net
assets value
The calculation of the number of shares of Discount Investments to
be issued to IDB Development is based on the ratio of the net assets
value of Discount Investments and the net assets value of PEC as
detailed above, on the rate of holdings of IDB Development in both
companies prior to the transaction and on the number of shares of
Discount Investments immediately prior to the transaction.
If we define the net assets value of Discount Investments with V(d)
and the net assets value of PEC with V(p) we can express the value
of Discount Investments after the transaction using the following
formula:
V(d) + 81.35% x V(p)
As the net assets value of the investments of IDB Development in the
two companies should not change due to the exchange, if we define
the rate of holdings of IDB Development in Discount Investments
after the transaction as S, then the following equation must be
correct:
81.35% x V(p) + 54.29% x V(d) = S(x)(V(d) + 81.35% V(p))
We will define the ratio of the net assets value of Discount
Investments to the ratio of the net assets value of PEC by
P (P=V(d)/V(p)) By dividing the above equation by V(d) and
simplifying the equation we will get:
S=(54.29% x P + 81.35%) / (P + 81.35%)
From a technical point of view if we define the number of shares of
Discount Investments before the transaction by N, and the number of
shares issued to IDB Development by S(n) the rate of holdings
calculated (S) we will also get the following equation:
Total number of shares held by IDB Development
in Discounts Investments after the transaction S(n) + 54.29% x N
S = ------------------------------------------------ = -----------------
Total number of shares of Discount Investments (N + S(n))
after the transaction
By solving the latter two equations we get:
S(n) = N x (81.35%/ p)
3. Details of the valuation of the certain companies held by Discount
Investments and/or PEC whose value significantly affects the exchange
ratio valuation
a. Property and Building Corporation
The Property and Building Corporation Ltd. (hereinafter: "The
Company" or "Property and Building") is very important in
determining the exchange ratio, as the rate of holdings of the
companies is significantly different: PEC 41.07 % and Discount
Investments 14.89%, and in view of the significant economic value in
the investments portfolios of both companies.
1) General
Property and Building is among the largest real estate
companies in Israel. During the years 1996-1997 and the
period 1-6/98 consolidated revenues turnover reached some NIS
389.8, NIS 444.4 and NIS 231.3 million respectively. Net
earnings for those periods totaled about NIS 63.2, NIS 69.1
and about NIS 43.5 million respectively. As of June 30, 1998
the shareholders equity of the Company is some NIS 951.3
million and its shares are traded on the Tel Aviv Stock
Exchange (hereinafter "The Stock Exchange") with a value of
some NIS 1,293 million.(1)
Most of the Company's advantages is in the land reserves in
excellent locations which it has held for long periods.
The Property and Building Group includes its subsidiary
companies, the main ones of which are Bayside Land Ltd.
(64.7%, hereinafter - "Bayside") and Hadarim Properties Ltd.
(90%, hereinafter - "Hadarim Properties") whose shares are
traded on the Stock Exchange. The Group is engaged in the real
estate market with all its varied activities and concentrates
mainly in three main fields of operations:
a) Construction for residential and commercial purposes -
companies wholly owned by Hadar Properties Ltd. operate
in this field: Gad Buildings Ltd. (hereinafter "Gad")
and Naveh Building and Development Ltd. (hereinafter:
"Naveh"), which on June 30, 1998 were in the stage of
constructing about 240 residential units at 4 different
sites. The company also owns about 23.1% of K.B.A Ltd.
(hereinafter: "K.B.A.") which is engaged in constructing
projects for residential and commercial purposes in
Ashdod, and owns some 1,660 dunam net, in this area
(which are about 2.605 dunam gross). Additional
companies active in this field are Bayside Area Co.
which erects residential projects in Kiryat Motzkin and
Ramat Gan (together with Naveh) and the Company itself
which has a project in Petach Tikva (the "Mother of
Settlements") with 712 residential units of which about
66 residential units are designated for rental.
- ----------
(1) Data of the market value of the Company and the other companies in the
Group traded on the Stock Exchange as detailed below, relate to the
average market value during the period 9.4.98 - 8.10.98. This data is
given as background only and was not used in the valuation.
Of the 646 remaining residential units, about 408 have
not yet been constructed, about 126 residential units
were completed of which 116 have been sold and about
112 are being erected as of June 30, 1998.
b) Income producing assets - This activity is centralized
mainly in the Bayside corporation and its affiliated
companies, which own some 400,000 sq. meters of
industrial and commercial buildings for rental, in which
average occupation as at 6.30.98 was about 91%. Bayside
holds some 35.23% of Ispro Israel Company for Renting
Buildings Ltd. (hereinafter: "Ispro") which owns about
9,356 sq. meters of buildings for rental. Ispro's shares
are traded on the Stock Exchange.
In addition, the company and its wholly owned
subsidiaries have buildings for rental with a total area
of about 37,537 sq. meters, which are rented with full
occupancy, apart from 6,272 sq. meters in a building in
the area of the Ramat Gan Diamond Exchange ("Harel
House") in the final stages of building, of which about
50% have been rented. In the whole Group some 100,000
additional sq. meters of revenue producing areas are
being constructed, mainly by the Bayside Company.
The rate of occupancy in income producing assets of the
Group during the years 1996-1997 varies between 91-.95%
on average. The average occupancy on 6.30.98 was about
91%, and expresses a drop in occupancy as compared with
the past, both due to market conditions and due to the
increase of revenue producing areas owned by the Group.
c) The Citrus Branch - The Company is engaged in this field
through Hadarim Properties which holds about 34.9% of
the shares of Mehadrin Ltd. (hereinafter: "Mehadrin"),
whose shares are traded on the Stock Exchange. Mehadrin
has complete control of Pri-Or Ltd. and together they
are the largest exporter of citrus fruit in Israel.
Mahadrin is the owner of many orange groves in a strip
stretching from Gedera to Hadera, with a total area of
about 15,394 dunam, and it is operating to develop the
agricultural real estate it leases in those sites where
a change in the use of the land is being planned.
Moreover, the Company and its wholly owned subsidiary are
engaged in various fields of operations: Aklim 2000 (for
ecology), (hereinafter: "Aklim") is engaged in installing
air-conditioning systems and Hon Investment and Trust Co.
Ltd. (hereinafter: "Hon") which provides management and
maintenance services for real estate.
The main companies in the Group are public companies or
companies partially owned where the operational structure and
cash flows are separated from one another. Therefore, an
analysis of the Group and a valuation was done separately and
the reference is to individual
financial statements of each company. (This with the exception
of Bayside, Naveh, Mehadrin and Ispro) whose subsidiary
companies are wholly owned or they are included on the basis
of proportional consolidations, so that the assets in the
consolidated statements reflect the Company's share.
The economic valuation of the real estate assets is based on
the opinion of an assesor Alfred Irani, dated October 15, 1998
who agreed to mention and include it in our Opinion and it is
attached hereto as Appendix No. 3. See the reference in the
Opinion on item 5b on page 24 below.
The following is the structure of the Company's holdings on
6.30.98:
PROPERTIES AND BUILDING - HOLDINGS CHART - AS AT JUNE 30, 1998 (NIS million)
[ORGANIZATIONAL CHART OMITTED]
19
2) Property and Building "Solo" a wholly owned (100%) companies
The Company has buildings for rent with a total area of some 40,000 sq.
meters which on 6.30.98 were completely occupied. Moreover, the Company
has office floors in the Hard Building in Ramat Gan in the final stages of
completion with an area of 6,272 sq. meters of which about 50% have been
rented.
The balance sheet value of these assets is about NIS 131,487 thousand as
compared with an economic value of some NIS 321,376 thousand. In addition
the Company has building projects for residential purposes in Petach Tikva
("Mother of Settlements"), which as on 6.30.98 included inventory of real
estate for construction of 408 residential units on which building had not
yet started. About 112 residential units are under construction and about
10 residential units are completed and in inventory. The balance sheet
value of these assets, less advances from purchasers of apartments, totals
some NIS 10,910 thousand and the economic value is estimated at some NIS
94,080 thousand.
Moreover, the Company has vacant land in Tirat Hacarmel with an area of
some 80.6 dunam. The balance sheet value is about NIS 686 thousand as
compared with an economic value estimated at about NIS 12,468 thousand.
3) The Affiliated Companies
a) Bayside
The Bayside Company is one of the largest and oldest real estate
companies in Israel. The Company is engaged in initiating, planning,
constructing, renting and managing industrial and storage areas,
Hi-Tech industrial parks, office buildings and commercial centers,
and initiating, constructing and marketing prestigious residential
quarters.
On 6.30.98 shareholders equity totaled some NIS 663.4 million and
its shares are traded on the stock exchange at an average market
value of about NIS 831 million. In 1997 and during the period 1-6/98
its revenues turnover totaled about NIS 241.9 million and 91.7
million, respectively. Net income for those periods totaled about
NIS 61.9 million and about NIS 32.9 million, respectively.
The following is a summary of data regarding the Bayside's assets as at 6.30.98:
Average % occu-
Depreciated monthly rent pation
Balance Economic Rent per leased sq. as at
at 6.30.98 value 1-6/98 Area meter 6.30.98
---------- ----- ------ ---- ----- -------
sq.
NIS thousand meters (NIS)
------------------------------- ------- ----
Income producing
assets 456,332 788,607 45,449 309,727 26.9 91%(2)
Land and income producing
assets under construction(1) 239,712 305,901 420,694
Other fixed assets 1,133 1,133 -- --
------- --------- ------- -------
Total fixed assets 697,177 1,095,641 45,449 730,421
======= ========= ======= =======
The main income producing assets include the Bayside Center in
Herzliya with a total area of about 26,500 sq. meters which is
leased for commerce and hi-tech (mainly up to the year 2002). An
additional site in Herzliya with an area of about 22,300 sq.
meters, which is mainly leased to Scitex Ltd. (up to the year
2003), industrial and commercial buildings in the Haifa Bay area
with an area of 54,533 sq. meters (rented usually for periods of
between 3-5 years) and industrial areas in Yavneh and Caesaria
with a total area of some 77,418 sq. meters of which 34,000 sq.
meters are rented until the year 2006 and the balance rented for
an average period of 3-5 years.
The income producing assets under construction including mainly a
second and third building in the Bayside Center in Herzliya with a
total area of about 40,500 sq. meters and an office building in the
South Kirya Tel Aviv with a total area of about 35,000 sq. meters
(Bayside and Hadarim assets each have 24.5% of the building).
Bayside owns real estate whose balance sheet value on 6.30.98
totaled about NIS 62,317 thousand and whose economic value is
estimated at some NIS 191,600 thousand. Moreover, on 6.30.98 Bayside
had 2 residential projects under construction. One in Kiryat Motzkin
in which abut 1,224 residential units are planned and the second
project "Merom Naveh" in Ramat Gan in cooperation with the Naveh
Company in which 919 residential units are planned. The total
investment as at 6.30.98 in inventory of work in process, including
inventory of apartments which have not yet been sold, totaled some
NIS 163,372 thousand. The economic value of these projects and the
inventory of apartments is estimated at some NIS 214,134 thousand.
b) Hadarim Properties
Hadarim Properties are engaged, on it own or through affiliated
companies, mainly in the following fields:
o Construction for residential purposes - In this field the Company
operates through the wholly owned consolidated companies Gad and
Naveh. The main building sites are: Ramat Gan ("Merom Naveh"),
Herzelyia ("Naveh Amirim"),
- ----------
(1) Liabilities for work under construction relating to combination
transaction totaling NIS 54,945 thousand was set-off from the depreciated
balance of the economic value.
(2) Average rate of occupation over the years 1994-1997 range between 97-99%.
Tel Aviv ("Ramot Naveh"), Givat Shmuel ("Givat Naveh") and Jerusalem
("Givat Mesuah").
o Nechasim Menivim - The Company is engaged in the initiation,
development, planning and construction, renting and management of
industrial, office and commercial buildings. These operations are
concentrated mainly in Ispro in which it holds some 35.23% and
through the hi-tech industrial center ("HTIC") in which it holds
some 25% (Bayside has an identical holding in these companies).
Ispro and HTIC have rented areas in an aggregate area of some
118,000 sq. meters.
o Hadarim - Hadarim Properties hold 334 dunam of orchards owned by it
and leased by it in Nes Ziona, Beit Degan and Kadima. Moreover,
through its holding of 34.96% in the Mehadrin Pri-Or Group it
operates a range of activities in the citrus branch: planting,
working, packaging and marketing to the local market and exports.
In addition to these activities, Mehadrin has extensive areas of
orchards in areas between Gedara and Hadera in a total area of about
15,394 dunam, (most of which are leased from the Israel Lands
Administration). Mehadrin is active in developing the real estate in
which it plans a change of approved usage from agricultural real
estate to building.
Shareholders equity of Hadarim Properties on 6.30.98 totaled about
NIS 439.2 million(1) and its shares are traded on the stock exchange
with a value of about NIS 485 million. Its turnover in the "Solo"
account in 1997 and for the period 1-6/98 totaled some NIS 12,350
and NIS 18,210 thousand, respectively. Net earnings for those
periods totaled about NIS 6,637 and NIS 15,786 thousand,
respectively. The considerable increase in earnings during the
period 1-6/98 results from recognizing revenues from the sale of 47
residential units in the project of the Naveh Company in the Lamed
Area of Tel Aviv ("Ramot Naveh") in the first half of 1998.
- ----------
(1) Including receipts on account of options totaling NIS 10,191 thousand.
The following is a summary of data regarding income producing assets,
real estate and inventory of work in process, net
according to the companies held by Hadarim Properties as at 6.30.98
(in NIS thousand)
- ------------------------------------------------------------------------------------------
Type of asset Income producing assets
- ------------- ----------------------------------------------------------------------------
NIS per
Sq. meter Occupancy
Balance Economic Rent Rented per rate
sheet value sq. meters value 1-6/98 month 6.30.98
----------- ---------- ----- ------ ----- -------
Hadarim
Properties
(Solo) 3,674 2,400 13,055 436 30.2 100%
Naveh -- -- -- -- -- --
Gad 5,761 7,035 31,848 1,170 35.1 79%
----- ----- ------ ----- ----
Total 9,435 9,435 44,903 1,606 33.6
===== ===== ====== ===== ====
- ------------------------------------------------------------------------------------------
(Continued)
- ------------------------------------------------------------------------------------------------------------------
Inventory of work in progress
less advances from customers
Type of Income producing assets under (construction for building for
asset construction residential purposes) Real Estate
- ----------- --------------------------------- ---------------------------------- --------------------
Balance Balance Balance
sheet Sq. Economic sheet No. of Economic sheet Economic
value meter value value units value value value
----- ----- ----- ----- ----- ----- ----- -----
Hadarim
Properties
(Solo) 59,339 12,810 67,840 -- -- -- 12,042 91,675
Naveh -- -- -- 32,519 238 80,164 212,345 255,553
Gad 25,112 4,050 34,103 3,058 22 11,280 210,559 233,364
------ ------ ------- ------- ------- ------ ------- -------
Total 84,451 16,860 101,943 35,577 260 91,444 434,946 580,592
====== ====== ======= ======= ======= ====== ======= =======
- ------------------------------------------------------------------------------------------------------------------
c) Ispro
Ispro is engaged on its own and through subsidiaries in initiating,
planning, constructing, renting industrial commercial and storage
buildings and the production of industrialized elements for the
construction industry through the Trom-raz Plant in Beersheva.
Ispro's shareholders' equity as at 6.30.98 totaled some NIS 126.7
million, and its shares are traded on the stock exchange with a
value of some NIS 127 million. We should state that the
marketability of the shares is very low (the average daily trading
volume during the period 1-6/98 and 1997 was about 8.8 and about NIS
37.9 thousand respectively), and therefore its market value cannot
be used as a reliable indication of its economic value.
In 1997 and during the period 1-6/98 turnover totaled about NIS
22,299 and about NIS 12,046 thousand, respectively. Net earnings for
those periods totaled about NIS 5,607 and NIS 2,992 thousand,
respectively.
On 6.30.98 Ispro owned about 90,356 sq. meters of revenue producing
assets, at an occupancy rate of some 88% at that date. Average
occupancy rate over recent years ranged between 88 - 90%. Revenues
from rentals for the period 1-6/98 totaled some NIS 8,581 thousand
which is an average of about NIS 18 per leased sq. meter per month.
Ispro has a leading project in Netanya with an area of about 12,870
sq. meters rented at an occupancy rate of about 95%. In addition it
has about 8,000 additional sq. meters in various stages of
construction. Moreover, it has an income producing asset in
Beersheva with a total area of about 46,400 sq. meters rented with
an occupancy rate of about 86%.
Ispro together with Gad Ltd. received a license for the construction
of two commercial stories with an area of about 2,800 sq. meters
above a parking garage and above them about 60 residential units in
Givat Shaul Jerusalem.
The following is a summary of the data of income producing assets
leased and under construction (NIS thousand)
Income Producing
Income Producing Assets (including the Assets under
Company's offices construction Total
---------------------------------------------- -------------------- ---------------------
NIS
per sq.
Balance meter Balance Balance
sheet Sq. Economic Rent leased per sheet Economic sheet Economic
value meters value 1-6/98 month value value value value
----- ------ ----- ------ ----- ----- ----- ----- -----
103,219 90,356 166,665 8,581 17.9 32,882 76,091 163,101 242,755
We should state that in the prefabricated building sector there is a
significant drop in sales and gross profits, resulting from the
weakness of the market in the construction industry. The following
is a summary of data of prefabricated building operations. (NIS
thousand).
1-6/98 1997 1996 1995
------ ---- ---- ----
Sales 3,465 5,251 8,782 15,101
Cost of sales (3,377) (5,581) (7,811) (13,231)
------- ------- ------- -------
Gross profit, (loss) 88 (330) (971) 1,870
------- ------- ------- -------
Due to the recession in the branch, no significant improvement is
expected in this field of operations in the near future, and
therefore these operations do not significantly affect the estimated
value of this valuation. In view of this Ispro is focusing today in
the field of incoming producing assets.
d) Mehadrin
The Company was incorporated in 1951 by a group of citrus growers
with government encouragement with a view to rehabilitate and
develop the citrus industry in Israel.
Today its business operations are focused mainly on operations in
the citrus fruit branch, the promotion of projects in agricultural
fields, supplying storage services and land for fruit, and
developing agricultural land it leases, in which a change in
permitted use is being planned. In addition the Company has income
producing assets rented: The "Hadarim" shopping mall in Netanya.
offices and shops in Tel
Aviv and areas in Even Yehuda and Gan Haim. Operations and
profitability in the citrus industry is cyclical and affected by the
significant risks to which the branch is exposed.
Mehadrin's shareholders' equity totaled about NIS 259.5 million on
6.30.98, and its shares are quoted on the stock exchange with a
value of about NIS 441 million. On 6.30.98 Mehadrin and its 100%
owned subsidiary - Pri-Or - have orchards with a total area of about
15,394 dunam (most of which are leased from the Israel Land
Administration), as follows:
Economic Average Price
Site Dunam Value Per Dunam
- --------------- ------- -------- --------------
(NIS thousand)
-------------------------
Zita 1,666 51,925 31.2
Pardasisa 1,909 97,982 51.3
Hadassim 1,110 89,548 80.7
Sarafand 2,476 91,675 37.0
Ashkelon 2,779 48,954 17.6
Others 5,454 185,661 34.1
------- ------- ----
Total owned
by Mehadrin 15,394 565,745 36.7
Real estate
requisitioned(1) 1,036 29,336 28.2
------- ------- ----
Total 16,430 595,081 36.2
======= ======= ====
The main asset owned by Mehadrin is the above orchards, which are
valued by an assessor. In addition he assessed the value of income
producing assets and packing plants. The cold storage equipment and
the packing plant equipment is estimated at their balance sheet
value. In our opinion the asset value of the active real estate in
the field of orchards (including the packing houses) and the
equipment owned by Mehadrin is higher than the value of these assets
in the existing operations, and result from cash flows expected from
the operation of orchards and the installations connected with these
operations. Therefore, the economic value was determined according
to the asset value.
The following is a table summarizing the data of income producing
assets (including cold storage installations), packing plants and
orchards owned by Mehadrin (NIS thousand):
Income Producing Assets (including cold storage equipment)
Packing Plants Orchards
-------------- --------
-------------------- ---------------------------------
Balance Sq. Economic Rent 1- Total Balance Economic Balance Dunam Economic
sheet meters value 6/98 NIS per sheet value sheet value
value sq. value value
meter
monthly
rent
105,500 34,320 124,171 9,908 48.1 36,065 60,139 72,548 16,430 595,081
e) K.B.A.
- ----------
(1) Mehadrin submitted a claim to the District Court in Tel Aviv regarding
orchards which were requisitioned with a total area of about 1,036 dunam,
in which the Court was requested to declare that Mehadrin is entitled to
full and fair compensation due to the requisition of the said land. In
April 1998 with the agreement of Mehadrin and the State, an expert
assessor was appointed by the Court in order to evaluate the value of the
land requisitioned. His opinion will be submitted to the Court, which is
entitled to rule at its discretion. The value included in the assessor's
valuation and the evaluation was determined taking into account this
procedure.
K.B.A.. was established in 1957 as a private enterprise, with a view
to plan and develop the city of Ashdod, in consideration for
receiving rights and part of the areas of the city according to an
agreement with the government which own half of the rights in K.B.A.
during the years 1964-1985.
Today, the shareholders of K.B.A. are: The Company (23.13%), The
Israel Central Corporation for Trade and Investments (52.84%), a
member of the Clal Group, Shikun Ovdim (24.02%). Shareholders'
equity as at 6.30.98 totals some NIS 12.5 million.
K.B.A. owns about 1,660 dunam net in Ashdod (equals about 2,605
gross dunam), of which about 970 dunam is undeveloped and their use
has not yet been determined, and about 540 dunam which are
designated for residential and commercial purposes, and 150 dunam
earmarked for industry. Most of this land, has not yet been
registered in the name of K.B.A., but is still registered in the
State's name.
The following is a summary of data of real estate owned by K.B.A.
(including the Promenade project and the Company's offices) (NIS
thousands):
Balance Sheet Economic Area in dunams, Average value per
value value gross dunam
----- ----- ----- -----
6,934 509,016 2,605 195.4
It should be emphasized that to the best of K.B.A's knowledge, the
Regional Commission on Planning and Building Ashdod is discussing
new plans according to which the undeveloped area owned by the
Company of about 60 dunam net, (which is about 1,000 dunam gross)
will be kept as an open area ("dunes"). The assessor's evaluation
takes this into account.
In December 1997 the Ben-Ami family sold 10.5% of the holdings in
K.B.A. to A.A. Holdings Ltd., a member of the Clal Group. The price
of the transaction reflected a company value of about 137.5 million
dollars.
4) The positioning of the Company in the Construction and Real Estate
Branch
The Company is one of the largest real estate companies in Israel
and the other three large competitors are: Azorim (which controls
SHOP - Housing & Development for Israel Ltd.), Africa Israel and
Housing and Construction Holdings, the controlling shareholder of
Shikun Ovdim. The shares of most of the large real estate companies
are quoted on the stock exchange apart from Shikun Ovdim and Ashdar
(a member of the Ashtrom Group). This, mainly due to the capital
intensive requirements of companies in the construction branch.
The following are a number of indicators about the four largest companies in
the branch:
Housing &
Property & Construction
Data as at 6/30/98 Building Azorim Africa Israel Holdings
- -------------------------------- -------- ------ ------------- --------
Market value (NIS
million) 1,362 1,007 940 1,200
Shareholders equity
(NIS million) 951 1,238 994 21
Total balance sheet
(NIS million) 2,100 3,721 3,206 2,127
Capital multipliers 1.43 0.81 0.94 58
Multiplier of market
value of the assets(1) 0.95 0.62 0.80 0.87
- --------------------------------------------------------------------------------
Data for 1997 (adjusted to 6/98)
Revenues from buildings
(NIS million) 244 753 781 929
No. of residential units
sold 328 1,300 969 896
Revenues per residential
unit (NIS thousand) 1,338 580 805 1,038
- --------------------------------------------------------------------------------
Revenues from income
producing real estate
(NIS million) 140 74 91 21
Area of income
producing real estate
(thousands of sq. meters) 460 92 135 --
Revenues per sq. meters
per month (5) 6.9 18.2 15.3 --
- --------------------------------------------------------------------------------
Other revenues 60 339 236 2,662
--- ----- ----- -----
Total revenues
(NIS million) 444 1,166 1,108 3,612
=== ===== ===== =====
In a comparison between the companies we should state that the
companies are differentiated in their focusing on different fields
of real estate (initiating and building contractors, revenue
producing assets, contracting for roads and infrastructure) and are
engaged also in additional fields. In this way, for example, Housing
and Construction Holdings is engaged also in the fields of
electromechanical contracting, the manufacturing of raw materials
for construction and paving and contracting abroad (although most of
its operating profitability are provided from its activities in the
real estate sectors). The above comparison is given as background
only, and is not used for the purpose of the valuation of Properties
and Building. Compared to the other companies (excluding Housing and
Construction Holdings) the Company has land reserves in excellent
locations held for a long time, which explains the difference in the
multipliers of the market value of the assets.
The real estate branch is affected by limitations of land reserves
in Israel which are mainly owned by the State, from the capital
intensitivity required of it, from the long periods of the
procedures of planning and licensing, and from the consequences of
political processes. Therefore, the government's policies
- ----------
(1) This multiplier is meant to cancel the distortion of the capital
multiplier, which results from differences in leverage between companies.
The multipliers are calculated as follows: Market value of the share
capital plus the balance sheet value of balance sheet values net as at
6.30.98 divided by the total balance sheet (less financial assets which
were set-off from liabilities, as at 6.30.98).
regarding the use of land reserves, the vulnerability of capital and
its cost (the restraining policies of the Bank of Israel, the market
situation, the initial capital, etc.) and the policy of investing in
infrastructure, has considerable effects on industry.
In the building for residential purposes sector the sharp slowdown
which started in 1996 is apparent. The number of building starts in
1997 totaled about 50,850 residential units (a drop of 10% as
compared with the previous year) and in the first quarter of 1998
about 10,060 residential units (a drop of about 21% as compared with
the equivalent quarter in the previous year). Moreover, inventory of
unsold apartments is increasing and in the third quarter of 1997
reached a record 9,727 residential units which comprise about 69.7%
of the total apartments offered (private building in 24 largest
cities).
Also in the revenue producing real estate sector there is a slowdown
since 1996 and in fact this year, for the first time in the 90's, a
drop of some 5% in building starts in areas which are not for
residential purposes, which totaled about 3.5 million sq. meters.
This trend worsened in 1997 as a result of the drop of some 17% in
building starts which totaled about 2.9 million sq. meters only. The
following is a summarized description of the characteristics of the
market in the field of income producing real estate:
Industrial buildings - According to valuations the surplus supply in
industrial buildings today is about 2 million sq. meters, and the
total industrial buildings being built today is double the expected
demand up to the end of the year 2000. Most of the supply is
centered today in the southern part of the country and the number of
sites in the center, such as Netanya, Gedara, Rosh Ha'ayin and
Caesarea. We should state that in view of the low price levels
today, there is a trend of purchasing buildings by end users.
Offices - A similar trend, but more moderate, of over supply of
office areas, where most of the supply is in the Tel Aviv area as a
result of the construction of new buildings (the Levinson Towers,
Platinum and the Azrieli Center) and in Ramat Gan in the area of the
Diamond Exchange. On the other hand, the amendment to the Betterment
Tax Law, which cancels the exemption of apartments not used for
residential purposes, is liable to encourage the evacuation of
offices in residential buildings and a gradual transition to office
buildings. According to valuations today, the large supply in Tel
Aviv and Ramat Gan is expected to continue and force prices
downward, but at a more moderate rate.
In view of the surplus supply in the real estate branches and the
consequences of the recession in the economy, and when the crisis in
this field will pass, the valuation relates to the asset value and
the potential inherent in the existing assets of companies in the
Group, and does not include the potential profitability from
additional promoting activities in the future in which there is
considerable uncertainty.
5) Evaluation
a) Summary of the valuation
In our opinion and in view of the data we received, the checks
we carried out and based on the valuation of an assessor, the
value of Properties and Buildings is estimated at some NIS
1,781 million as compared with shareholders' equity in the
balance sheet as at 6.30.98 totaling about NIS 951.3 million.
The valuation of Property and Building is higher by 1.36 than
the average value of the stock exchange over the period
9/4-8/10/98, which totaled some NIS 1,293 million.
The following is the composition of the estimated value of the
companies.
Rate of
holdings in Balance Economic
capital sheet value value
% (NIS thousand)
---------- -----------------------
Property &
Building - Solo
and 100% owned See clause
subsidiaries(1) 100 111,487 307,365 2 above
Bayside 64.7 430,693 702,842 See clause
c)1 below
Hadarim See clause
Properties 90.0 389,596 744,685 c)2 below
K.B.A 23.13 19,577 82,870 See clause
3)e above
Provision for tax
as a result of the
realization of
affiliated
companies (56,406)
Total
shareholders'
equity 951,333 1,781,356
======= =========
- ----------
(1) Including the Herzliya Center A+B, Shadar, The Nachlat Beit Hashoeva
assets, the new "Mother of Settlements" North, Gilat Building Corporation,
the capital of the Investments and Trust Company, Aklim 2000, Property and
Building (Finance 1996).
b. Methodology
The value of Property and Building was based on the net assets value
method, which is based on the aggregate market value of its assets,
taking into account the tax effect and less the value of its
liabilities. The following is a description of the main methodology
applied in the valuation.
As we stated, the market value of the real estate assets of the
companies was based on an estimate prepared by the assessor Mr.
Alfred Irani (hereinafter: "the Assessor"). This estimate is not an
Assessor's Opinion pursuant to the provisions of the Land Assessor's
Regulations as the Assessor performed only part of the obligatory
procedures required for the purpose of a full Assessor's Opinion.
The estimate was prepared based on the following main principles:
The value of revenue producing assets was based on a discount
coefficient of about 9.5% - 11.0%.
The discount coefficient for each asset was determined mainly taking
into account the location of the asset and the level of demand for
assets of the type valued at that location and with a level of
occupancy of the particular asset (the more attractive the location,
the higher the demand and occupancy, so that the discount rate used
was lower).
A deduction of about 10-30% of the basic value of large sites was
taken into account. The rate of deduction for each asset was
determined mainly taking into account the area of the asset and
taking into account factors which also affect the discount rate as
detailed above;
In building projects under construction for residential purposes,
the Assessor valued the land only (including building rights),
without the cost of construction accumulated up to June 30, 1998 and
in view of this, for the purpose of a full valuation of the above
projects, we added the value to the land, as mentioned, to the
building costs accumulated to June 30, 1998, and the promoter's
profit, which is estimated at some NIS 18 thousand (about 5 thousand
dollars) per unit, before tax, which in our opinion is fitting for
the assets valued, taking into account the fairly limited volume of
building for residential purposes in the Group.
From the economic value of the assets, we deducted an estimate of
the expected tax liability in realizing them as follows:
o Projects under construction for residential purposes (business
inventory) - 36%;
o Fixed assets - 28% (excluding K.B.A. where a tax at the rate
of 20% was deducted as most of the assets have been held for a
long period and are entitled to reduced tax rates).
Over and above the tax liability on the realization of the assets,
an additional provision for tax at the rate of 7.5% was taken into
account on the addition to the value of the affiliated companies.
This addition expresses the potential to increase the tax liability
in the event that the shares of the affiliated company will be
realized instead of the assets.
The value of the companies which are engaged mainly in supplying
services to companies in the Group or in other fields, whose
contribution to profitability and to the balance sheet value is
lower, has been taken at their balance sheet values.
The value of options which Bayside issued was deducted from the
value of the net assets in order to receive the value of the share
capital. The value of the option warrants was estimated using the
Black & Scholes model based on an expected range of variances for
returns on shares of about 30-45% (based on the weekly variance of
shares of real estate companies on the Stock Exchange during the
quarter prior to the valuation, and based on the period of
realization of the options), the rate of real interest without risk
of about 6.5% (the accepted rate of interest for use in models at
the time of evaluation), the exercise period and price per share
embodied in the evaluation of the Company.
c. Details of Valuation of the Main Companies
1) Bayside (consolidated)
Balance Economic
sheet value value Remarks
----------- ----- -------
(NIS thousands)
Fixed assets 697,177 1,095,641 See clause 3(a) on page
Real Estate 62,317 191,600 See as above
See above, advances totaling NIS
Residential projects under construction and 57,884 were deducted from the value of
inventory of apartments, net 105,489 156,251 the projects
Investment in affiliated companies:
Ispro (35.23%) 41,243 71,870 See Clause 3(a) on page 18
Hi-Tech Industry Park (25%) 5,013 17,796
-------- --------
Total investment in affiliated companies 46,256 89,666
Deferred expenses 4,972 -
Financial liabilities less
current assets (240,896) (240,896) Balance sheet value
Deferred taxes/provision for tax (11,929) (177,971)
Marketable option warrants - (35,500) Estimated using the B&S model
-------- --------
Shareholders equity 663,386 1,078,79
======== ========
Balance Economic
sheet value value Remarks
----------- ----- -------
Value of investments in Property &
Building
In shares 429,333 697,977
In marketable option warrants 1,360 3,194
-------- --------
430,693 701,171
2) Hadarim Properties
Investment in affiliated companies 334,889 652,381 See Note A below
Revenue producing assets under
construction 59,339 67,840 See Clause 3 (b) on page 18
Land 12,042 91,675 See above
Revenue producing assets 3,674 13,055 See above
Fixed assets and others 4,052 1,738
Current assets less financial liabilities 25,218 25,218 Balance sheet value
Provision for tax - (24,474)
-------- --------
Shareholders' equity 439,214 827,433
======== ========
Value of investment in Property & Building
In shares (90%) 389,596 744,685
======== ========
Note A - Details of investment in affiliated companies
Investment according to balance sheet value
-------------------------------------------
In shares In loans Total
---------- --------- -------
Naveh(100%) 115,344 6,586 121,930
Gad (80)% 45,091 27,059 72,150
Mehadrin (34.96%) 85,734 -- 85,734
Ispro (35.23%) 39,699 -- 39,699
Others 15,376 -- 15,376
---------- --------- -------
301,244 33,645 334,889
========== ========= =======
contd.
Investment according to economic value
--------------------------------------
In shares In loans Total Remarks
---------- --------- ------- --------------------------
Naveh (100%) 190,844 6,586 197,430 See Clause 3(b) on page 18
Gad (80)% 94,865 27,059 121,924 See above
Mehadrin(34.96%) 233,027 -- 233,077 See Clause 3(d) on page 70
Ispro (35.23%) 71,870 -- 71,870 See Clause 3(c) on page 18
Others 28,130 -- 28,130
---------- --------- -------
618,737 33,645 652,381
========== ========= =======
B. Supersol Ltd.
The valuation of Supersol Ltd. is significant in determining the exchange
ratio due to the value of the Company and due to the different rates of
holdings of PEC (17.60%) and Discount Investments (22.32%).
1. Description of the Company
Supersol started operations in 1958, and today operates 125
supermarkets of various types. At the beginning of 1997, the Company
acquired 25 food stores from the Shekem chain (of which two stores
were closed after the acquisition), in consideration for some NIS
264 million, and in this way it significantly increased its market
share. The sales turnover of Supersol's food chains in 1997 totaled
about NIS 4.4 billion and was about 41% of the food sales of the
marketing chains in Israel and approximately 16% of all food sales
in Israel.
During the years 1997-1998, the Company ceased operations in a
number of fields which had resulted in losses - an investment in the
supermarket chain in Hungary, in the Super Office chain which sold
office equipment in Israel, and in a partnership with Ace-Buy and
Build which is engaged in the sale of "Do-It-Yourself" products. The
Company today focuses on the supermarket and food business.
90% of the Company's revenues during the last five years come from
the sales in the supermarkets. In addition to the supermarkets
business, the Company gave consulting services and supplied products
to grocery stores, mini-markets etc. Moreover, it invests in
shopping malls and commercial centers in those strategic locations
in which it operates "anchor" stores. Revenues from leasing assets
to third parties total some NIS 29 million in 1997 and some NIS 15
million during the first half of 1998.
Similar to its main competitor, the Blue Square Company, the Company
has a number of types of chains which are distinguished from each
other by their locations which are suitable for each one, size,
target population, the level of service, the range of products sold,
and the rate of gross profit which is characteristic to each one.
The following is a summary of data of the food activity of Supersol
according to the types of chains:
Number of store Total area as
--------------------------- Average size at 3.30.98 Typical
Type of chain 9/98 12/31/97 12/31/96 of store (sq.mt) (Sq. m.) location
- ------------- ---- -------- -------- ---------------- --------- --------
Supersol(1) 42 42 42 1,100 47,600 Urban suburbs
Hyperkol(1) 32 31 26 2,000 57,150 Shopping malls,
Commercial centers
Hyper Neto(1) 34 32 11 1,940 75,200 Commercial centers in
small cities
Universe Club(2) 3 2 2 7,150 24,350 Industrial areas
Rachel's Blessing 5 5 3 2,200 11,900 Religious communities
Cosmos(1) 1 1 -- 8,900 8,900 Industrial areas
"Hagal Hayarok"
(Green Wave(3)) 8 9 10 980 7,700 In small cities
--- --- -- ----- -------
Total 125 122 94 1,787 232,800
=== === == ===== =======
The Company intends to open about 30 new stores, with a total area
of some 100,000 square meters from the second half of 1998 and until
the end of the year 2000.
To-date about 75% of the goods was distributed to the stores by the
suppliers (and were even placed on the shelves by them). This method
creates a logistical burden on the branches, which are likely to
handle about 100 distribution trucks a day, and reduces the
flexibility in moving inventory and managing it. In March 1998, the
Company inaugurated a logistic center of 26,000 sq. m. in Rishon
Le'Zion, which was set up at a cost of NIS 205 million. The Center
is expected to gradually replace a considerable part of the direct
distribution by suppliers to the branches, to reduce the number of
supplier deliveries and to make managing the inventory more
efficient. As a result of applying this method, the rate of gross
profit should increase (due to suppliers discount in consideration
for the saving of distribution costs from their point of view), and
on the other hand, the costs of operating the logistic center and
self distribution will increase marketing costs. Consequently, an
improvement in the rate of operating profit is expected in the
future. The Company expects that operating the logistic center will
reduce the level of inventory. We should state that during the
period of trial operations, the level of inventory in the Company
increased as the level of inventory in the stores has not yet
reduced concurrently with the accumulation of inventory in the
logistic center. In the natural sequence of events, success in a
strategic change as this, which involves very large investments and
a change in the structure of the Company's operation, has
considerable risk and is subject mainly to the quality of
management, and the cooperation and an appropriate technological
level of the suppliers.
- ----------
(1) Full service.
(2) Cheap chain based on customers club.
(3) Limited service (limited offer of products compared to the full service
chains)
As a complementary operation to its main operation, a subsidiary of
the Company, Gidron, produces bakery products, prepared foods and
salads, which are sold in the chain itself and to outsiders.
The Company employs 7,660 employees as at June 30, 1998, as follows:
Type of Job No. of Employees
----------- ----------------
Supermarkets 6,600
Administrative employees 570
Gidron employees (bakery) 350
Management and administration 140
-----
7,660
=====
About 77% of the Company's employees and about 56% of wage expenses
are at the level of minimum wage. In April 1998, the minimum wage
was increased by 8.5%. The increase in minimum wage resulted in an
increase of about 4.8% in labor costs from March and thereafter.
Recently negotiations with the Worker's Committee concluded
regarding the new labor contract, whose effect on wage expenses is
not significant on the results of operations.
The Company has real estate owned by it and leased as at June 30,
1998, apart from real estate for the supermarket business, whose
value is estimated, according to the Assessor's opinion(1) at
about NIS 335.0 million as compared with a depreciated cost of
about NIS 381.5 million.
2. Description of the Business Environment
The retail food branch in Israel is composed of food chains,
mini-markets, grocery stores and open markets. The scope of
operations in this branch in Israel is some NIS 47 billion including
VAT. The leading chains in Israel are Supersol, Blue Square,
Hypershuk, Co-Op Tzafon and Greenberg. The division of the market
between the food chains and between the independent stores and
markets generally reflect the standard of living: as the standard of
living increases, so does the share of the chains, who offer a more
conformable purchasing and a wider choice of products at their sales
points. An improving level of mobility contributes also to this
trend. According to estimates which the Company published (in Form
F-20 for the year 1997), the marketing chains hold some 39% of total
expenses on food.
- ----------
(1) The Opinion of the Assessor, Mr. Alfred Irani dated October 15, 1998 who
agreed that we mention it in our Opinion. The opinion is not an assessor's
evaluation according to the provisions of the Land Assessors Regulations,
as the Assessor carried out only part of the procedures required for in
order to issue a full assessor's opinion according to the said
Regulations. As the value of these assets does not significantly affect
the exchange ratio, the Assessor's opinion has not been attached.
The following is summarized data regarding the consumption of food
and the development of sales of the organized retail market in
Israel.
1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
(in NIS of June 1998)
Consumption of food by households(2)
(in NIS millions) 34,630 36,041 38,759 42,094 44,841 47,015 48,360
Rate of annual increase in % 5.4 4.1 7.5 8.6 6.5 4.8 ??
Rate of increase of sales in organized
retail trading - food in % 3.3 0.8 7.8 10.3 12.5 15.9 9.1
Expense on food consumption per
capita (NIS thousands) 5.53 5.56 5.82 6.16 6.39 6.53 6.44
Rate of annual increase -0.7 0.5 4.7 5.84 3.7 2.2 ??
Source: Bureau of Statistics, 1998.
From an analysis of the retail trading operation in the food field
in the 90's, it can be seen that over the years 1991-1992 the rate
of increase of private consumption exceeded the rate of increase of
the chains' operations, and therefore the share of the chains in the
said market decreased. After a stabilization of market share of the
chains in 1993, the rate of increase of the marketing chains
exceeded the rate of increase of private expenditures by a
considerable difference since 1994 and thereafter. This trend is
affected by a number of principle factors. Firstly, the immigration
from the former Soviet Union was characterized by a rapid absorption
into the labor force and an increasing demand for consumption
products, with a clear preference for shopping at the marketing
chains which offer cheaper prices. Secondly, the rapid growth of the
Israeli economy in the first half of the 90's resulted in an
increase in the standard of living and an increase in private
consumption. Moreover, the creation of formats of "Discount" stores
lead to a penetration into an additional population sector - the
medium-lower income group. An accompanying trend to the above
changes, is a continued change in the consumers' preference and
patterns of their behavior over the last five years, according to
which the Israeli consumer prefers comfort, quality and saving.
The high rate of growth of food market chains and the increase in
their share of food sales, are affected, among other things, by a
strategy of segmentation- strategy to cover a market where the chain
addresses a number of market sectors, through an adjusted mix of
each sector. On the other hand, this method involves higher costs of
development, production and marketing of many products, and the need
to adjust them to the specific market segments.
In this framework, there were many significant changes in recent
years. Among recent development in the food chains, one can mention
the rapid deployment of chains throughout the country, the
establishment of "Discount Chains", the establishment independent
distribution centers in order to reduce costs and make operations
more efficient, the
- ----------
(2) Including VAT
establishment of customer clubs for the purpose of encouraging
sales, the acquisition of independent chains etc.
The proportional share of the marketing chains in food sales in the
United States is about 80% and in Western Europe about 60%.
Therefore, it seems that the potential for growth in the market
sector of marketing chains in Israel has not yet been exhausted. The
low rate of penetration of chains in Israel is explained mainly by
the standard of living and the higher level of motorization in these
other countries.
The following is a distribution of total sales of the food chains in
1997:
The
Blue Square Supersol HyperShuk Greenberg Co-op Jerusalem Total
----------- -------- --------- --------- --------------- -----
(in NIS millions of June 1998)
Sales 3,863.9 4,621.4(1) 1,589.5 744 452.2 11,271
% from total 34.3% 41% 14.1% 6.6% 4.0% 100%
Source: Dunn and Bradstreet, 1997.
The proportional share of Supersol in food sales of the marketing
chains in 1997 is estimated at some 41% (as compared with about 39%
in 1996). Its share of total retail food sales in 1997, is estimated
at some 16% (as compared with 14% in 1996).
The following is a description of Supersol positioning in the retail
food market in Israel according to the SWOT(2) model.
Advantages
a) Economics of scale - the Company has a larger sales area and
turnover than its competitors. In this branch there is an
advantage to size, both due to the bargaining power with
suppliers and due to the capacity which enables the operation
of an independent distribution and logistic organization,
which enables it to become more efficient and result in saving
for the Company, which is also likely to cause more
distribution expenses to independent stores.
b) The use of a marketing segmentation strategy - the spread of
stores which are aimed at different population segments and
supply a good response for the needs of different types of
customers.
c) Real estate basis in chosen location which ensures the choice
of the chain as an anchor in these locations, and gives the
Company additional profits.
d) An independent logistic center, which is expected to result in
savings of distribution costs, improvement in inventory
management in the stores and increased flexibility in
supplying the stores.
- ----------
(1) Includes also operations which have been terminated. Food sales turnover
alone reached some NIS 4.4 billion.
(2) SWOT - "Strengths, Weaknesses, Opportunities, Threats"
e) The management information system - the use of an advanced
technology system which reduces the cost of maintaining
inventory and costs connected with purchasing.
Disadvantages
a) A slow penetration of the chain's private brands - private
brands comprise only about 1% of the Company's sales. These
brands are characterized by higher gross profits due to their
lower cost as compared with the manufacturer's brands. The
Company did not invest significant resources to penetrate them
into the market, and therefore their proportional share in
sales is lower than the share acceptable abroad and compared
to the other chains in Israel. For comparison, the rate of
sales of private brands in Western Europe in 1997 stood at
about 22%.
b) Minimum wage - a high proportion of wage costs which is
determined by the authorities without any control by the
Company.
Opportunities
a) Absorbing the Shekem stores which were acquired in 1997. These
stores were characterized by a low rate of sales per square
meter as compared with similar stores in the Company.
Increasing sales of these stores to a level close to that
acceptable in the chain, will contribute considerably to the
Company's profitability. The estimate of investment in
renovating the Shekem stores (which is spread over three
years) is about NIS 60 million.
b) Penetrating the Arab and Religious sectors. The religious
sector includes about 75,000 families (over 3 years) and about
40% of the consumption basket of this market segment is
allocated to food, as compared with about 22% of the general
population. Consumption characteristics in the Arab population
are similar. The Company has five stores aimed at the
religious sector, and is recently setting up its first store
of the chain (Hyperneto) in the Arab sector in Kalanswa.
c) Increasing the share of private brands which is expected to
increase gross profits.
d) The Supersol chains are characterized by a fairly low level of
the "non-food" sales as compared with other chains, and
therefore there is a potential growth which has not yet been
exploited in expanding this field (including pharmacies and
bank branches), mainly in chains with large sales areas.
e) Developing direct marketing methods - telephone and internet
marketing. Success in implementing these methods requires a
considerable investment in developing suitable infrastructure
and friendly methods for the user.
Threats
a) Recession in the economy - a drop in demand and a freezing of
consumption per capita. The slowdown will result in a
reduction in consumption and the share of luxury items in this
basket. These products are characterized by fairly high rates
of profitability in the average consumption basket.
b) Increased competition in the branch - there is increasing
difficulty in obtaining good locations to open new stores. The
location has considerable importance, as being first makes it
easier to mobilize new faithful customers.
c) International food chains - there is an apprehension (with a
fairly low likelihood) that global chains will see the
potential in the branch, and penetrate into the market while
increasing competition. International chains enjoy large
budgets and considerable experience.
3. Financial Analysis
A summary of the Statement of Earnings and the Balance Sheet of the
Company is attached on the next page.
a) Sales and profitability
During the years 1995 - 1997 the Company's sales have
increased considerably, from about NIS 2.9 billion in 1995 to
about NIS 4.4 billion in 1997, an increase of about 49%.
The following is the distribution of the increase in revenues
between increasing commercial areas (including the acquisition
of the Shekem branches) and between increasing the level of
operations of existing stores:
Total increase
1-6/98 1997 1996 1995- 6/1998
------ ---- ---- ------------
(NIS thousands)
Increase resulting from opening new stores 10.4% 20.6% 12.4% 1,300
Increase resulting from existing stores 1.3% 4.0% 7.6% 389
---- ---- ---- -----
Total increase in sales 11.7% 24.6% 20.0% 1,689
==== ==== ==== =====
Estimate of sales per sq. m. (NIS thousands)* 21.4 20.4 23.8
---- ---- ----
Rate of change in sales per sq. m 4.9% (14.3%) 6.3%
---- ---- ----
* Including sales not through the stores.
Summarized data of Supersol
SuperSol Ltd.
Summary of Data*
(In thousands of shekels of 6/98)
- --------------------------------------------------------------------------------
Condensed Consolidated Statements of Income
- --------------------------------------------------------------------------------
1-6/98 1-6/97 1997 1996 1995
Sales 2,363,431 2,115,629 4,353,503 3,493,857 2,912,330
Cost of sales (1,756,889) (1,588,121 (3,241,306) (2,592,325) (2,129,382)
---------- ---------- ---------- ---------- ----------
Gross profit from sales 606,542 527,508 1,112,197 901,532 782,948
Rent and operating malls 15,219 14,879 29,407 27,425 27.693
Selling, general & administrative expenses (479,737) (409,934) (846,957) (668,438) (377,923)
Depreciation and amortization (51,618) (41,411) (91,156) (70,033) (62,713)
---------- ---------- ---------- ---------- ----------
Operating earnings 90,406 91,042 203,490 190,486 170,005
Financing revenues, net 8,361 7,655 458 14,563 18,615
Other revenues (expenses), net** 15,319 (2,935) (1,831) (6,584) (4,062)
---------- ---------- ---------- ---------- ----------
Earnings before taxes on income 114,086 95,762 202,117 198,465 184,558
Taxes on income (46,973) (36,670) (71,669) (73,105) (75,962)
---------- ---------- ---------- ---------- ----------
Earnings after taxes on income 67,113 59,092 130,448 125,360 108,596
Company's share in earnings of associated
companies 1,192 812 1,931 2,285 1,981
Company's share in losses of Super Office -- (9,190) (12,974) (33,780) (12,693)
Company's share in losses of Super Quart -- (2,313) (5,498) (1,816) (1,452)
Minority's share in losses (profit) of
consolidated companies (60) (37) 504 240 4,903
---------- ---------- ---------- ---------- ----------
Net Profit 68,245 48,364 114,411 ?? 101,335
========== ========== ========== ========== ==========
Rate of change in sales 11.7% 24.6% 20.0%
Rate of gross profit 25.7% 24.9% 25.5% 25.8% 26.00%
Rate of operating earnings to revenues 3.8% 4.3% 4.7% 3.3% 5.5%
Rate of profit from revenues 2.9% 2.3% 2.6% 3.2% 3.5%
Effective tax rates 41.2% 38.3% 35.5% 36.8% 41.2%
Return on shareholders' equity at beginning of
year (on annual basis) 9.7% 8.3% 9.6% 10.2% 10.0%
* For the first half of 1998 the item includes capital gains from the sale of
Super Quart of NIS 31,313 thousand.
- --------------------------------------------------------------------------------
Condensed Consolidated Balance Sheet
- --------------------------------------------------------------------------------
6/30/98 12/31/97
Current assets
Cash 33.420 l5,600
Marketable securities 138,337 269,331
Short-term loans and deposits 30,228 23,588
Customers 549,044 537,362
Other receivables 50,880 52,100
Inventory 320,564 291,568
--------- ---------
1,122,473 1,089,549
--------- ---------
Investments and loans
Investments in Super Office
and Super Quart -- 1,144
Investment in associated
company 71,055 79,908
Long-term loans and
receivables 30,357 24,980
--------- ---------
101,442 106,032
--------- ---------
Fixed assets 1,595,363 1,506,275
--------- ---------
Other assets 59,615 76,617
--------- ---------
--------- ---------
Total 2,879,393 2,778,473
========= =========
Current ratio 1.45 1.46
Current liabilities
Credit from banks 10,066 38,972
Suppliers payable 591,982 579,860
Other debtors 17l,984 126,817
--------- ---------
774,032 745,649
--------- ---------
Long-term liabilities
Bank obligations
380,013 386,751
Other obligations 6,573 6,200
Severance pay 6,289 4,843
Deferred taxes 28,468 26,492
--------- ---------
421,523 424,486
--------- ---------
Shareholders
equity 1,683,838 1,608,338
--------- ---------
--------- ---------
Total 2,879,393 2,778,473
========= =========
Financial leverage 0.06 0.06
A calculation carried by us based on audited consolidated statements, from which
the data relating to Super Office and Super quart have been extracted.
The decrease in sales per sq.m. in 1997 is because the level of
operations of the Shekem stores purchased, was lower by some 40%
than the level of the other stores in the chain. During the first
half of 1998, there was an improvement in the level of sales at the
Shekem stores, and the Company expects their level to reach a level
close to the level of sales of the other stores in the chain.
The trend of increasing sales per square meter is affected, among
other things, by the increase in the standard of living in Israel
(an increase in food consumption per capita), and from the expansion
of direct marketing and food distribution operations to other stores
by the head office (which is technically expressed, in the increase
in sales per sq. m.).
Gross profit
The rate of gross profit of the Company went down from about 26.9%
in 1995 to a level of about 25.5 - 25.8% in 1996 and thereafter.
Among the factors for the drop in gross profit are:
o an increase in the proportion of sales in the cheap chains,
where gross profit is l ow, due to the increase in the
commercial areas of these chains.
o The effect of the recession in the market led to a change in
the basket of purchases: a drop in the share of luxury
products which are characterized by higher gross profits, and
an increase in the share of basic food products, which are
characterized by lower gross profits.
o The strong competition between the chains created a price war
on the consumer's pocket. Local campaigns which are earmarked
to maintain a market share, reduce gross profit (e.g. the
"500" campaign which took place recently at the Hyperkol,
according to which the chain undertook to supply 500 products
at the cheapest prices in the market.
A factor which sets off the drop in gross profit is the increasing
discounts by suppliers due to the increasing volume of operations.
Selling, General and Administrative Expenses:
The following is the distribution of selling, general and
administrative expenses (in NIS of June 1998):
1-6/98 1997 1996
------ ---- ----
NIS % NIS % NIS %
thousands of sales thousands of sales thousands of sales
--------- -------- --------- -------- --------- --------
Wages 247,507 10.47 435,906 10.01 350,999 10.00
Rent and Taxes 71,813 3.04 130,406 3.00 98,339 2.81
Gross advertising expenses 50,921 2.15 69,163 1.59 49,650 1.42
Other expenses, net 109,496 4.64 211,482 4.86 169,450 4.85
------- ----- ------- ----- ------- -----
Total selling, general and
administrative expenses 479,737 20.30 846,957 19.46 668,438 19.08
======= ===== ======= ===== ======= =====
These expenses are fixed in character, partly at the general company
level and part at the store level. Advertising expenses are derived
from management decisions taking into account the competitive
condition in the market. The considerable increase in advertising
costs reflects a significant increase in the level of competition in
the Company's business environment, as the drop in gross profit is
also discernible. We should state that some of the suppliers
participate in the advertising costs during joint campaigns with the
Company.
Over and above increasing the number of branches and selling areas,
there are additional reasons for increasing overhead expenses in the
Company, as follows:
o the increasing use in means of direct marketing which includes
operating costs such as: postage, advertising, telephone
operators, packaging etc.
o The total cost of the logistic center, the warehouses and
distribution system was estimated to reach some NIS 60 million
per year. The additional cost for the logistic center, which
was set up in March 1998, is about NIS 16 million on an annual
basis. As the center did not operate at full capacity, its
operation has reduced gross profit at this stage.
Other expenses include, among other things, commissions to credit
card companies of some 0.75% of the transaction volume cleared
through them (about 62% of turnover), which totaled during the first
half of 1998, about NIS 13 million and for 1997 about NIS 24
million.
Financing Revenues, net
The Company has net financing revenues resulting from two main
sources: net financial investment, and financial revenues from
operations.
Financial revenues from operations are derived from the erosion of
debts to suppliers (for an average period of about 48 - 51 days)
less the erosion of customers debts (an average period of about 20
days). The credit to customers results mainly from the use of credit
cards (about 62% of the volume of the Company's operations, as
compared with cash payments which is about 30%, checks about 5% and
purchase voucher about 3%). It should be emphasized that most of the
credit (over 90%) is given through credit cards, the volume of
credit in the balance sheet represents the top credit in the month
(where a large part of it is paid on the 2nd of the following
month), and not the average level of credit over the year. We
estimate, that the average volume of credit during the whole period
is about 60% of the level of balance sheet credit at end points. The
level of credit
to customers in Israel is proportionally higher than that acceptable
in the world, and remained constant over the last two and a half
years.
We should state, that in view of expectations of low inflation, it
is expected that the operating financial revenues in the future will
decrease.
With regards to financial financing revenues, net, we should state
that loans given and received are linked to the index, and therefore
the Company is not exposed to risks connected with changes in the
rate of exchange.
The following is the composition of financing revenues in the years
1996 - 1998:
1-6-/98 1997 1996
------- ---- ----
(NIS thousands)
Financial financing revenues (expenses) 2,961 (9,075) (2,000)
Operating financing revenues 5,400 9,533 16,563
----- ----- ------
Total 8,361 458 14,563
===== ===== ======
The considerable increase in financing expenses in 1997 results
mainly from the investment in acquiring the Shekem stores.
Taxes -
The Company has final tax assessments (including independent
assessments considered to be final) up to and including the 1991 tax
year. Thirteen consolidated companies received final assessments for
the years between 1990 and 1994. Five additional consolidated
companies have not yet received assessments since their
establishment. The following are the effective tax rates in recent
years:
1997 1996 1995
---- ---- ----
35.5% 36.8% 41.2%
The drop in the effective rate is due mainly to the use of losses
from previous years, for which no deferred tax was created. The
effective tax rate in the future is expected to stand close to the
statutory tax rate plus about 1 - 2% for non-recognized expenses.
b) Balance sheet analysis
The balance sheet structure shows high financial stability.
Shareholders equity as at June 30, 1998 totaled about NIS 1,684
millions which comprised about 58% of the total balance sheet.
Current assets totaled about NIS 1,222 million, including the
balance of customers of about NIS 549 million, which is mainly
composed (85%) of the balances of credit card companies, cash and
marketable securities totaling about NIS 201 million. The high
liquidity is
expressed in the comparison of the current ratio to those of the
Company's main competitor:
30.6.1998 31.12.1997
--------- ----------
Supersol 1.45 1.46
The Blue Square 0.84 0.87
The composition of fixed assets as at June 30, 1998, is as follows:
NIS thousands
-------------
Real estate in operating stores 673,300
Other real estate 381,471
Equipment and installations 418,684
Renovations 110,856
Vehicles 11,552
---------
Total 1,595,863
=========
The other assets are comprised mainly of goodwill totaling NIS
39,929 million, mainly resulting from the acquisition of the Shekem
store chain (76%).
The financial leverage is composed mainly of long term index linked
loans bearing interest of a rate of 3% - 4.4% percent, which is
lower than market rates.
The deferred tax reserve, results mainly from the difference between
the rate of depreciation on the buildings in the books (about 2%)
and between the rate of depreciation for tax purposes (about 4%).
Deferred taxes receivable for capital loss are transferred for tax
purposes, are the main factor in reducing the said reserve. Capital
losses can be set off in the future against capital gains only
(including capital reserve from the sale of Ace Buy and Build in the
third quarter of the year).
4. Valuation
a) Summary of the valuation
The value of Supersol is estimated by us in the area of NIS 2.156 -
2,464 millions, as compared with shareholders equity of NIS 1,684
million as at June 30, 1998. The value of the Company, based on the
average share price on the Stock Exchange during the period of
September 28th - October 8th, 1998, is about NIS 2,146 million.
The composition of the estimated value is as follows:
NIS millions
------------
Capitalization of the expected cash flows
from operating the stores 1,921.4 - 2,229.4
Value of real estate assets which are not
operated for stores, according to an assessor's evaluation 335.0
Economic value of investment in Avnat Ltd., according
to an assessor's evaluation 13.8
Balance sheet value of investment in Lev Hamifratz company 23.8
Value of investment in Ace Buy and Build, less tax 33.0
Financial liabilities, net (170.8)
-----------------
Total value of share capital 2,156.2 - 2,464.2
=================
Based on the above valuation, the value of Discount Investments'
investment (22.3%) in the Company is estimated at about NIS 481 -
549 million, and the value of PEC's investment (17.5%) at about NIS
377 - 431 million.
The estimated value expresses a multiplier of 16.5 - 18.9 of net
earning for the first half of 1998 grossed up on an annual basis.
These multipliers express a considerable expected growth in revenues
(about 10% per annum in real terms in the coming five years) and in
net operating earnings (over 20% per annum for the coming four years
and about 4.5% for the year thereafter). For comparison, the average
market value of the shares of the Blue Square, in the month prior to
the valuation, expresses a multiplier of about 16 respectively.
b. Methodology
The valuation was prepared by the discounted cash flows method. The
expected cash flows is a function of the forecasted profit while
taking into account the influence of exogenous factors for the
Company, such as the economic situation in the economy and the rate
of increase of the population, and taking into account the Company's
operations in the market, where competition between the large
marketing change results in a limitation on profit margins. A
setting-off trend of this effect, is extricating itself from
losing operation and logistic efficiency being taken.
c. Basic assumptions
(1) Revenues and gross profits
Supersol's volume of operations is subject to the level of expenses
on food and related products in Israel, and on the market share
which Supersol will succeed in attaining in this market.
The expected change in the volume of sales is estimated based on the
following principles:
o The rate of increase of the population in Israel is estimated
at about 2.4% average per year, as compared with about 2.6%
average in the last 15 years, which was partially affected by the
waves of immigration.
o The change in expenses on food is derived from the rate of
increase of the population and the expected rate of increase
in consumption per capita. We assumed, that in view of the
recession in the economy, there will be no change in expenses
on food per capita in the first two years of the forecast, and
thereafter there will be an increase in consumption per capita
of about 2% per annum, similar to the average change over the
last 15 years.
o In view of the increase in the standard of living in Israel
and the expected development momentum of the marketing chains,
including Supersol (increasing commercial areas of the
marketing chains over the increase of commercial areas of
private stores and markets), we assumed, that the share of
marketing chains will increase from an estimated average of
40% in the first half of 1998 to about 53% after five years of
growth (annual growth of about 2.5 - 3% in market share of the
chains).
o The dominant marketing chains today (excluding Hypershuk -
Co-Op Tsafon) are the owners of the dominant resources in the
Israeli economy. Therefore, there is no reason to assume a
significant change in market share of the large chains, and
therefore we assumed a stability in market share of Supesol
within the chains.
o At the end of the forecast period, we assumed that the rate of
increase in sales will be an average of about 4.5%, similar to
the expected rate in expenses on food in Israel on the basis
of the above assumptions.
Rate of gross profits is subject, among other things, to the level
of competition in the market, selling methods (the "Discount" chains
are characterized by a significantly lower profit than the profit in
the traditional stores), the standard of living (the preference of
basic products against luxury products which are characterized by a
higher gross profit), the distribution center, the volume of sales
of private brands, and the strength of the Company vis-a-vis its
suppliers (which affect the distribution of profits between the
manufacturer/importer and the marketer).
In our opinion, in view of the total aforementioned factors (see
Clauses 1 - 2 above), the Company is expected to increase its gross
profit gradually from some 25.7% in the first half of the year to
about 26.5% after the four years of forecast.
(2) Selling, general and administrative expenses
These expenses are divided into expenses at the level of the head
office and the expenses of the stores, and mostly they are fixed or
variable and subject to the decision of management at every level.
The forecasted expenses for the future is estimated according to
their following characteristics:
o We assumed that advertising expenses will be about 2% of
turnover as compared to about 2.15% in the first half of 1998.
The volume of investment in advertising will increase
significantly in view of the rate of increase in sales (about
8-10% per annum in real terms).
o Rent expenses and taxes connected mainly to the volume of the
areas operated by the Company and a mix of assets (assets
owned against assets rented and their location). Accordingly,
we assumed that the volume of expenses per square meter will
remain stable in the future. In this assumption there is an
assumption of a certain increase in cost, as most of the
potential development is not in centers of the cities.
o Wage expenses are affected from the increase in wages (in our
opinion about 2% per annum on average, including changes in
the minimum wage which is not controlled by the Company) and
the expected increase in commercial areas. As a significant
part of wage expenses relate to the head office, we assumed
that wage expenses will increase by about 45% of the increase
expected in the commercial areas, in addition to current
price-rise. In addition, we took into account a gradual
increase of about NIS 70 million in the level of wages in the
first year of the forecast due to the operation of the
logistic center and the requirement to display prices.
o The rate of other expenses on sales stood at some 4.65 - 4.85%
in recent years, and therefore we assume that it will remain
stable with a rate of about 4.85% in the future.
(3) Operating financing revenues
These revenues are derived from the volume of credit from suppliers
as compared given with customers, and the inflationary erosion of
these balances. In the evaluation we estimated changes in the level
working capital, as mentioned, according to changes in the volume of
sales, and an inflationary erosion of 5% per annum was assumed.
(4) Tax expenses
The effective tax rate is estimated at about 2%, which is 2% higher
than the statutory tax rate.
(5) Investments in fixed assets and depreciation
Depreciation is not a cash expense, but is recognized as an expense
for tax purposes and therefore affects the payment of tax.
Therefore, we added the depreciation to net operating profit and
deducted the expected investments in fixed assets (from the total
depreciation, the
depreciation on revenue producing assets which were valued
separately, was deducted).
The investment in fixed assets is divided into investment in
renovating operating branches, which is estimated at some NIS 80
million in the coming year (as compared to about NIS 80.8 million in
1997 and about NIS 39 million during the period 1 - 6/1998) and is
expected to increase with the increase in commercial areas in the
future, and investment in erecting new stores. This investment is
subject mainly to the structure of ownership on the asset, its
location, the character of the store and its area.
In the valuation we assumed, that for the purpose of realizing the
increase in sales, the Company will have to invest between NIS 210 -
260 million (including an investment in renovating branches). The
level of investment in the long run (which is earmarked to support
lower rates of growth) is estimated at some NIS 215 million. In the
long term, the level of the investment is equal to the level of
depreciation.
(6) Decrease in operative working capital
The increase in the volume of operations requires an additional
investment in customer credit and inventory, and against it the
Company enjoys additional suppliers credit. Operating the logistic
center in the second quarter of the year, caused an increase in the
level of inventory due to its running-in operation, the level of
inventories in the stores has not yet gone down concurrently with
the accumulation of the inventory in the logistic center. For the
purpose of the estimate of investments in inventory, we assumed a
gradual efficiency, which will enable the reduction of the level
inventory in terms of inventory days to a higher lever of some 5
days only, over and above the level which existed prior to the
operation of the logistic center.
As the Company pays its suppliers after sale of the goods and
collection of the consideration from the customers (on average), the
increase in the level of operations increases suppliers credit (due
to the increase purchases) over and above the need of investment in
credit to customers (as part of the sale which were added are credit
sales) and inventory and therefore results in a positive cash flow.
(7) Non operational assets in food business
These assets include the investment in Ace Buy & Build, which was
included at its selling price less the estimate of the tax applied;
the investment in Lev Hamifratz Company, which was included at its
balance sheet value; the investment in Avant Ltd., which was
estimated on the basis of the valuation of a real estate assessor
owned by it; and real estate assets, which were included in the
valuation according to the valuation of the Assessor, Mr. Alfred
Irani, dated October 15, 1998. As the estimated value is not higher
than the cost of assets in the balance sheet, there is no potential
tax liability on the realization of these assets.
The following are the main details regarding real estate assets,
which are not used for food operations:
Balance Built up Economic Rent Rent per leased Rate of occupancy
sheet value area value 1-6/98 meter per month as at 30.6.98
-------------- -------- -------- -------- --------------- -----------------
(NIS thousand) (Sq. m.) (NIS thousand) (Dollar) (Average)
Revenue producing
assets 224,844 41,611 222,260 10,526 14.2 81%
Land and revenue
producing assets
under construction 156,627 112,767
------- -------
Total 381,471 335,027
======= =======
(8) Net financial liabilities
The composition of net financial liabilities, which were deducted
from the value of operations in the food field, is as follows:
NIS thousands
-------------
Long-term liabilities to banks 380,013
Short-term liabilities to banks 10,066
Liabilities for retirement of employees 6,289
Long-term liabilities to others 6,753
Cash (33,420)
Marketable securities (138,337)
Short-term loans and deposits (30,228)
Long-term loans and deposits (30,357)
-------
170,779
=======
(9) Discount rate
The Company almost never uses the financial leverage, among other
things, as a result of an issue which made in the fourth quarter of
1997 (in consideration for some 90 million dollars), and due to the
influence of the sale of the holdings in Super Office, Kozert and
recently also in Ace - Buy & Build. An analysis of the cash flows
forecasted in the future shows, that the Company is not expected to
increase the financial leverage despite the significant investments
expected to be effected to expand the chain.
The discount rate taken into account in the valuation, varies
between 8.75% - 9.75%, and reflects mainly the return required by
the shareholders. Trading in the food field, which enjoys demand
also in periods of economic recessions, gives the Company a low
level of risk compared to the "market portfolio", where the return
required in Israel is estimated in the area of 12%-13% in real terms
based on the long-term market return on shares.
On the next page is a forecast of cash flows, an evaluation and a
sensitivity analysis estimated for changes in the price of capital
and the rates of growth after the end of the forecast period.
Super-Sol Ltd
Cash Flow Forecast and Estimated Value
(In thousands of shekels of 6/98)
1-6/98 Representative
Actual 1st year 2nd year 3rd year 4th year year
---------- ---------- ---------- ---------- ---------- ----------
(on an annual
basis)
Sales 4,726,862 5,203,330 5,637,989 6,212,326 6,826,600 7,483,230
Cost of Sales (3,513,778) (3,866,074) (4,174,931) (4,584,696) (5,020,964) (5,500,174)
---------- ---------- ---------- ---------- ---------- ----------
Gross Profit on Sales 1,213,084 1,337,256 1,463,058 1,627,630 1,805,636 1,983,056
---------- ---------- ---------- ---------- ---------- ----------
Rental and operating malls 30,438 Estimated
separately
Selling, general & administrative
expenses (959,474) (1,109,621) (1,197,621) (1,309,568) (1,435,319) (1,569,357)
Depreciation & amortization (103,236) (105,769) (113,323) (121,394) (129,710) (215,000)
---------- ---------- ---------- ---------- ---------- ----------
Operational earnings 180,812 121,866 151,608 196,668 240,607 198,699
---------- ---------- ---------- ---------- ---------- ----------
Other expenses, net* (1,677) -- -- -- -- --
Operating & financing revenues 10,400 18,456 19,899 21,818 23,856 26,125
---------- ---------- ---------- ---------- ---------- ----------
Earnings before tax 189,535 140,322 171,508 218,486 264,463 224,824
Taxes on income (53,322) (65,173) (83,025) (100,496) (85,433)
--------------------------------------------------------------------------------
Net operating earnings 86,999 106,335 135,461 163,967 139,391
With addition of depreciation 105,769 113,823 121,394 129,710 215,000
Less investments in fixed assets (210,000) (240,000) (240,000) (260.000) (215,000)
Plus decrease in operational
capital 10,587 25,241 30,859 36,000 2,000
--------------------------------------------------------------------------------
Net operational cash flow (6,645) 5,399 47,713 69,677 141,391
================================================================================
Net operational cash flows net of
capitalization (6,343) 4,696 37,812 50,312 1,973,447
==================================================================
Sensitivity Analysis of the Estimated Worth (In NIS '000)
---------------------------------------------------------
Summary of Estimated Worth NIS thousands Rate of growth at the end of the forecast period
- -------------------------- ------------- ------------------------------------------------
3.5% 4.5% 5,5% 6.5%
Value of operation in the food field 2,059,924 775% 2,919,724 3,708,018 5,197,017 9,068,413
Value of investment in Ace Do it Y- 33,000 8.25% 2,611,220 23,212,668 4,251,513 6,477,672
Yourself less tax
Value of investment in Lev Hamifraz Corp 23,769 Capitalization 8.75% 2,361,823 2,834,293 3,597,507 5,039,132
Economic value of investment in Avnat 13,817 rate 9.25% 2,156,122 2,535,947 3,118,347 4,124,309
Value of investment in Real estate 335,028 9.75% 1,983,612 2,294,759 2,752,328 3,491,478
Net financial liabilities (170,779) 10.25% 1,186,916 2,095,812 2,463,715 3,027,834
---------
Total worth of the Company 2,294,759 10.75% 1,710,690 1,928,963 2,230,387 2,673,658
=========
- --------------------------------------------------------------------------------------------------------------------------------
* Data of the first half of 1998 on an annual basis include capital gains from
the sale of Super Quart in a total sum of NIS 32,315 thousand.
Assumptions
Rate of capitalization 9.75%
Rate of growth following the end of
the forecast period 4.5%
1st year 2nd year 3rd year 4th year Representative year
-------- -------- -------- -------- -------------------
Rate of growth in sales 11.7% 10.1% 8.4% 10.2% 9.9% 9.6%
Rate of gross profit from sales 25.7% 25.7% 26.0% 26.2% 26.5% 26.5%
Rate of operating earnings 3.3% 2.3% 2.7% 3.2% 3.2% 2.7%
Rate of effective tax 0.0% 38.0% 38.0% 36.0% 38.0% 38.0%
C. Elron Electronic Industries
The evaluation of Elron Electronic Industries Ltd. (hereinafter: "Elron"
or "the Company") is significant in determining the exchange ratio mainly
due to the different rate of holdings of PEC (13.51%) and Discount
Investments (26.28%).
1) Description of the Company
Elron is an investment company investing in companies operating in the
fields of defense electronics, communications, medical imaging,
semiconductors, computerized systems for optical testing and information
and Internet technologies.
Elron's investments in Elbit Medical Imaging, Elbit Systems, and Elbit
which were created as a result the split-up of Elbit in effect from
December 1996, comprises about 71% of the total assets of the Company. The
Company has a number of investments in private companies in the field of
hi-tech which are at various stages of products development, and which
have not yet reached profitability. Therefore, their economic value is
subject to considerable uncertainty.
The Company's share are traded on the Tel Aviv Stock Exchange and NASDAQ.
The market value of the Company (according to the average share price
during the periods September 28 - October 8, 1998) totaled some $263
million. The Company's shareholders equity on June 30, 1998 stood at some
at about $261.7 million.
2) The summary of the evaluation
The value of Elron is estimated at some $326.9 million (about NIS 1,308
million according to rate of exchange of NIS 4 to the dollar), compared to
shareholders equity on June 30, 1996 of about $261.7 million and a market
value of $263 million (at average price per share during the period
September 28 to October 8, 1998).
The following are details of the estimated value of the main affiliated
companies:
Value or
investment in Value of Rate of
Estimated Rate of Elron balance sheet Elron contribution
value Holdings on 6.30.98 Holdings to value
----- -------- ---------- -------- --------
($ million) ($ million)
Elbit Imaging 321.9 39.85% 111.0 131.5 31.8%
Elbit Systems 275.7 34.77% 52.5 97.0 27.9%
Chip Express 100.0 36.81% 4.5 36.8 10.6%
Elbit 66.0 40.00% 35.3 28.2 8.1%
Mediagate 60.0 39.16% 3.1 23.5 6.7%
Zoran 60.8 16.21% 6.2 9.9 2.8%
Netvision
(fully diluted) 37.5 25.92% 5.8 9.7 2.8%
Others 14.5 32.4 9.3%
---------- -------- --------
Total value of holdings in companies 232.9 369.0 100.0%
--------
Less provision for tax on revaluation of value of
holdings -- (34.6)
Net financial assets 28.8 28.8
Amortization of value (Discount) due to Elron
operating as a holding company (10%) -- (36.3)
---------- --------
Total value of a share holders equity 261.7 326.9
========== ========
ELRON ELECTRONIC INDUSTRIES LTD.
SUMMARY OF DATA
(IN THOUSANDS OF US DOLLARS)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
1-6/98 1-6/97 1997 1996 1995
------ ------ ------ ------ -----
REVENUES
Company's share of earnings (losses)
of affiliated companies (1)36,640 338 (75) 2,751 4,667
Profits from changes of holdings in
affiliated companies 1,890 29 10,826 690 3,799
Net sales 7,700 -- 3,367 -- --
Other revenues, net 8,721 10,650 18,976 10,846 5,755
------ ------ ------ ------ -----
54,951 11,017 33,094 14,288 24,221
------ ------ ------ ------ -----
OPERATING EXPENSES (2)(11,783) (2,218) (7,308) (3,580) (5,415)
------ ------ ------ ------ -----
Operating earnings 43,168 8,799 25,786 10,708 8,806
Net financing revenues 569 361 1,202 571 1,498
------ ------ ------ ------ -----
Earnings before taxes 43,737 9,160 26,988 11,279 10,304
Tax on Income -- -- (243) -- --
------ ------ ------ ------ -----
NET EARNINGS 43,737(1)(2) 9,160 26,745 11,279 10,304
1) Includes Elron's share of the profits in the sale of the Ultrasound
(diagnostic) division by Elbit Medical Imagining for a sum of about $36.5
million.
2) The increase in operational expenses is due to the operations of the
consolidated subsidiary company Elron Software, which began operation at the end
of October 1997. These expenses are mainly marketing and selling expenses as
well as research and development expenses.
Rate of change in revenues 398.8% 131.6% 0.5%
Rate of operational earnings from revenues 78.6% 79.9% 77.9% 74.9% 61%
Rate of net earnings from revenues 79.6% 83.1% 80.6% 78.9% ?
Return on shareholders' equity at beginning
of the year* 44.1% 9.3% 13.3% 5.7% --
* In yearly terms.
CONDENSED CONSOLIDATED BALANCE SHEET
6/30/98 12/31/97
------- --------
Current assets 30,640 29,038
Long-term receivables 240,439 193,356
Fixed assets 1,251 473
Other assets 7,754 --
------- --------
Total 280,084 222,867
======= ========
Current ratio
6/30/98 12/31/97
------- --------
Current liabilities 8,667 4,443
Long-term liabilities 9,700 --
Shareholders equity 261,717 218,424
------- --------
Total 280,084 222,867
======= ========
Financial leverage None None
- ------------------------------------------
OWNERSHIP STRUCTURE AS AT 6/30/98 (%):
Discount Investments 26.28
PEC 13.51
Discount 5.59
Galil Uzia 0.90
Poalim Provident Funds 7.16
Leumi Provident Funds 5.01
Poalim Mutual Funds 3.03
Ilanot Discount 1.48
Leumi Mutual Funds 1.37
Public 35.67
------
100.00
======
- ------------------------------------------
3) Methodology
The marketability of Elron shares is reasonable. Average daily trading
stood at about NIS 1,672 thousand at the Tel Aviv Stock Exchange and about
$475 thousand on the NASDAQ during the period January to July 1998. In
view of its material significance in the investments portfolio of Discount
Investments, we did not rely on the market value of the Company as a sole
indication of its economic value which was valued according to its Net
Asset Value -- (NAV). According to this method, the value of the
investment company is equal to the value of its various holdings, taking
into account the cost of management, surplus assets, the financial
liabilities of the parent company and tax aspects. This method is the most
suitable for an investment company which does not enjoy constant or
regular cash flows.
4) The affiliated companies
The following is a description of the main affiliated companies and the
methodology used in their economic evaluation:
a) Elbit Systems Ltd.
Elbit Systems Ltd. (hereinafter: "ESL") is engaged in projects to
improve the platforms of airborne, land and sea weapons, projects
for developing and producing integrated military systems, designing
and developing electronic systems and products in the military
field. ESL is significantly affected by the trend of cuts in
security budgets in Israel and abroad, which result in budget cuts
for the acquisition of new equipment on the one hand, and a
significant increase in budgets for the improvement of old equipment
(mainly in developing countries) on the other hand. Recently there
was an increase in the level of the Company's operations. This trend
is expected to continue in the near future due to the increase in
the number of projects for improving aircraft. Among the projects
carried out by ESL in this field recently, include projects to
improve MIG 21 aircraft for Rumania (with a total turnover of some
$348 million) a transaction to supply avionic systems with a
turnover of some $65 million in the framework of a project to
improve F-4 aircraft for the Turkish Air Force, in which the Company
acts as a sub-contractor of the Israel Aircraft Industries and
participates in the project to improve 45 F-5 aircraft of the
Turkish Air Force with an expected turnover of some $21 million.
A summary of ESL's financial statements, of its market value and the
structure of its ownership are detailed on page 48.
The Company's order backlog as at June 30, 1998 totaled some $681
million (about 76% of the supplies during 1998-1999), as compared
with $670 million on 12.31.97. 74% of the orders are from abroad, a
situation which shows the drop in Elbit's dependence on the Israeli
defense market. The Company reports revenues from projects based on
the Finished Work Method. Sales in 1997 were characterized by an
increase in sales to the European market (32% of total sales in 1997
as compared with about 17% in 1996) and a drop in sales to South
America and Asia. Sales to the Israeli market comprised some 27% of
total sales in 1997 and sales to the
US - 29%. About 60% of the sales are in the field of airborne
systems, about 20% in the field of control and supervision and about
14% in the field of armored vehicles.
In 1997 there was an improvement in the Company's profitability. The
rate of gross profit increased in 1997 to about 27% as compared with
about 24.7% in 1996, and net earnings totaled some $22.2 million as
compared with about $18 million in 1996.
Evaluation
The marketability of Elbit Systems shares is reasonable (an average
daily aggregated turnover on NASDAQ and the Tel Aviv Stock Exchange
of $1,182 thousand. We chose to value the Company according to its
market value as some $275.7 million (an average period
9/28-10/8/98). Moreover, we checked the reasonability of the
Company's market prices according to the market value and in
comparison with average multipliers of the air and defense
industries (these multipliers are based on 50 leading companies in
the industry). This comparison is relevant in view of the
significant export operations of ESL:
ESL Air and Defense Industries*
--- ---------------------------
Net earnings multiplier 10.9 14.75
Sales multiplier 0.70 0.79
Shareholders equity multiplier 1.89 3.34
* Source: www.marketguide.com, 10/13/98
The equivalent group comprises some 50 companies, in which Elbit
Systems is placed 17 on the list from the point of view of its
market value. ESL multipliers are to some extent lower than the
multipliers in the industry, both due to the relatively improved
results which it presented in 1996 and 1-6/98 (the improvement in
the report results relate partly from fluctuations which
characterized operations in long-term large projects, the rates of
profitability and the periods of performance are different), and due
to the larger risk environment of the Company as compared with
American companies due to its location in Israel.
The value of Elron's holdings in ESL shares (34.77%), plus the value
of holdings in its bonds totaling $1.1 million, therefore totals
some $97.0 million.
Page 48 (Hebrew - table)
ELBIT SYSTEMS LTD.
Summary of Data
(in thousands of US dollars)
Condensed Consolidated Statements of Income
1-6/98 1-6/97 1997 1996 1995
------ ------ ---- ---- ----
Sales 203,341 178,968 372,342 307,508 299,858
Cost of sales (146,988) (131,105) (271,795) (231,418) (219,442)
-------- -------- -------- -------- --------
Gross profit 56,353 47,863 100,547 76,090 80,416
Research & Development expenses, net (16,988) (14,572) (27,884) (21,768) (18,243)
Selling expenses (15,414) (13,091) (28,264) (21,573) (24,064)
General & administrative expenses (6,178) (6,047) (13,232) (9,690) (8,870)
-------- -------- -------- -------- --------
Operating earnings 17,773 14,153 31,167 23,059 29,239
Financing revenues (expenses), net 350 100 (316) 595 1,349
Other revenues, net 113 122 83 12 324
-------- -------- -------- -------- --------
Earnings before taxes 18,236 14,375 30,934 23,666 30,912
Taxes on income (4,970) (4,150) (8,316) (5,812) (6,579)
-------- -------- -------- -------- --------
Earnings after taxes 13,266 10,225 22,618 17,854 24,333
Company's share in earnings (losses) of
partnership (408) (420) (463) 155 (160)
-------- -------- -------- -------- --------
Net earnings 12,858 9,805 22,155 18,009 24,173
======== ======== ======== ======== ========
Rate of change in sales 13.6% 21.1% 2.6%
Rate of gross profit 27.7% 26.7% 27.0% 24.7% 26.8%
Rate of operating earnings from revenues 8.7% 7.9% 8.4% 7.5% 9.8%
Rate of net earnings from revenues 6.3% 5.5% 6.0% 5.9% 8.1%
Return on shareholders' equity at beginning of 19.9% 26.9% 28.5% 29.3%
year*
* In annual terms
Condensed Consolidated Balance Sheet
6/30/98 12/31/97
------- --------
Current assets 188,753 216,160
Long-term 99,357 73,772
receivables
Fixed assets 33,337 29,797
Other assets 804 958
------- --------
Total 322,251 320,687
======= =======
Current ratio 5.34 1.40
Quick ratio
Current liabilities 140,927 154,692
Long-term liabilities 35,327 30,675
Shareholders equity 145,997 135,320
------- --------
Total 322,251 320,687
======= =======
Financial leverage None None
Ownership structure as at 6/30/98 (%):
Elron 34.77
BenLeumi Provident Fund 4.02
Leumi Trust Fund 3.64
Leumi provident Fund 3.09
Dikla Trust Fund 1.32
Ilanot Discount 1.22
Gil Emanuel 0.95
Galil Uzia 0.88
Bruchei Ygal 0.28
Akerman Joseph 0.22
Public 49.61
------
100.00
======
b) Elbit Medical Imaging
Elbit Medical Imaging (hereinafter: "EMI") is engaged in the fields of
medical imaging through subsidiary companies. On April 9, 1998 EMI sold
its ultrasound operations (the holdings of a 100% in the shares of
Diosonic) to General Electric in consideration for $228 million and
registered capital gains of about $111 million. As a result of this sale
the Company remained with liquid assets of some $200 million, out of which
it distributed a dividend of $21.5 million. After the sale the Company
remained with two subsidiaries:
1) Elscint (in which it holds about 57%) is engaged in the development,
production and marketing of advanced medical diagnosis systems: CT,
gama cameras (MN) MRI and mammography. Elscint's shares are traded
on the New York Stock Exchange with an average market value of
Elscint for the period 9/28-10/8/98 (after the notice of the
realization of the transaction of the CT and the MRI - see below)
totaling some $173 million. The marketability of Elscint's shares is
low and thus market value cannot be relied upon as a reasonable
indication of its economic value.
Recently, (September 1998) Elscint signed an agreement in principle
for the sale of the CT division to Picker, in consideration for $275
million, and an agreement in principle for the sale of the MRI
division and the distribution and service divisions in the field of
nuclear medicine (NM) to G.E. Medical Systems in consideration for
$100 million.
On the completion of these transactions Elscint will remain mainly
with liquid assets of some $250 million (taking into account the
above considerations and estimated tax and reorganization expenses
at a rate of some 33% of the consideration, plus production
operations with subcontractors and an investment in a joint venture
with the GE Group in the field of nuclear medicine, whose value is
estimated at some $40 million based on a multiplier of about 16 and
net expected representative earnings of some $2.5 million.
Therefore, Elscint's value is estimated at some $290 million
compared with shareholders equity on June 30, 1998, prior to the
above transactions, totaling about $202 million.
2) Elbit Medical Services (EMS), which is 100% owned is engaged in
the operation of three medical diagnostic and treatment centers in
Hungary and one center in India. EMS has marginal profitability and
in view of its secondary importance in the valuation, the investment
in it was valued at its balance sheet value as at June 30, 1998
totaling $16.5 million.
Evaluation
EMI shares are traded on the Tel Aviv Stock Exchange and on NASDAQ.
Average daily trade in turnover is the Tel Aviv Stock Exchange
during the months January to July 1998, where some $331 thousand and
the average daily turnover on NASDAQ stood during that period at
about $582 thousand. Despite the reasonable market turnover, there
was an extreme condition in which the market value of EMI, about
$200 million on average during the period 9/28 -10/8/98, was higher
than the net monetary assets of this Company (about $147.1 million
on 6/30/98) and does not
correctly reflect the value of the investment in Elscint according
to its net asset value.
In view of the aforesaid, we valued EMI at net asset value, about
85% of which reflects the net financial assets in view of the above
estimates. The following is the estimated value composition:
EMI
Valuation balance sheet
--------- -------------
(NIS million)
-------------------------
Surplus of Solo balance sheet assets
of EMI as at 6.30.98 140.1(1) 134.7
Balance sheet value of investment in
EMS(2) 16.5 16.5
Value of investment in Elscint 165.3 115.0
--------- -------------
Value of EMI 321.9 266.2
========= =============
The value of Elron's investment (39.85%) in EMI's shares is
estimated on this basis at some $128.3 million plus the investment
in bonds totaling some $3.2 million, give a total investment of
Elron in EMI of some $131.5 million.
c) Elbit Ltd.
Elbit Ltd. (hereinafter: "ELB") focuses its business operations in
the field of communications of local networks and access products to
public networks in the field of projects and products in the
telecommunication field. Elbit operates in the field of
communications through the following subsidiaries:
o Elbit Com (100% owned by "ELB"), whose only asset is an indirect
holding of some 16.5% in Partner Communications Ltd., which on
2.19.98 won the license for the third cellular operator in Israel
using the GSM technology, and started marketing its services in
October 1998.
o Hynex (60% owned by ELB) - a company whose shares were acquired
towards the end of 1996 in consideration for some NIS 27 million.
The Company is engaged in the transfer of data in local and public
communications networks using ATM technology. Hynex recently started
selling its first product at a level which is as yet still not
significant. The other shareholders in Hynex have an option to sell
Elbit an additional 34% in consideration for NIS 31.8 million.
o Cabeltel (100% owned by ELB) - is engaged in the field of
transferring telephone conversations and data on a cable television
network and connecting the network to the public telephone network
("WAN"). In
- ----------
(1) Balance sheet value, plus deposit in banks for giving loans to employees,
which were deducted in the EMI balance sheet from its shareholders'
equity.
(2) Including a loan of some $7.3 million
January 1995 it set up a company together with two Chinese
companies which have licenses to build and maintain a
communications network for the supply of cable television in the
Province of Tiansin in China, a joint venture, whose goal is to
market Cabeltel systems in China. The system is in the trial
stages in China and has not yet received all the approvals
required to operate. In addition, the venture is confronting
competition on the part of companies which manufacture standard
telephone equipment. In view of the aforesaid, the Company's
operations are subject to uncertainty, both technologically and
commercially.
Moreover, ELB has operations in additional fields through the
following affiliated companies:
o Elbit Computerized Optical Testing Systems Ltd. - EVS ( some
54% owned by ELB), which is engaged in the development,
production and marketing of computerized systems for optical
testing used mainly for improving quality and discovering
defects in production processes. EVS's shares are traded on
the NASDAQ. The average market value of the Company (for the
period 9.28-10/8/98) is about $12.5 million.
o Inframatrix Inc (20% owned by ELB) is developing, producing
and marketing thermal imaging systems based on infra-red
technology. In the past Eblit held 100% of the shares of this
Company and in September 1996 sold 80% of the shares in
consideration for about NIS 96 million. The purchasers have
the option to acquire the balance of Elbit's holdings in
Inframatrix for $10 million.
o Foxboro N.M.R Ltd. (25% owned by ELB) is developing
applications for process control in the petrochemical
industry.
Up to the end of 1997 the Company operated a plant for Elbit CTV
television sets, which operations were terminated. Most of the
Company's operations today are carried out through EVS, while the
balance of the companies are in product development stages and have
not yet presented significant revenues.
In addition to the above holdings Elbit holds some 20% of the shares
of Histour Elbit, a travel agency controlled by Koor Tourist
Enterprises (51%) and a member of the Koor Industries Group.
ELB shares are traded on the Tel Aviv Stock Exchange and NASDAQ. The
market value of the Company (according to average in the period
9/28-10/8/98) stands at some $55.2 million.
A summary of the financial data of ELB, the development of its
market value and the structure of its ownership are attached on the
next page. As the main part of its investments do not yet express
current profitability the business results of the past have a
marginal effect from the value point of view.
Valuation
The marketability of ELB shares is comparatively low (the average
aggregate daily turnover in NASDAQ and the Tel Aviv Stock Exchange
are about $296 thousand during the period 1-7/98) and therefore
there is difficulty in relying on the market value of the Company as
a sole indication determining its economic value. In view of the
description of the Company's operations as mentioned above, which
reflect a high level of uncertainty regarding future profitability,
we cannot rely on the cost of the investments in determining its
value. Shareholders equity of ELB as at 6.30.98 totaled some $76.8
million.
In view of the above considerations, and in view of its low weight
of the investments of ELB in valuing the exchange ratio, we valued
ELB in the field of its market value and balance sheet value at some
$55.2 - $76.8 million. Elron's share (40%) of shareholders equity
plus the value of the investment in bonds totaling some $1.8
million, therefore ranges in the field of $23.9 -$32.5 million.
d) Chip Express Corporation
The Company is developing a unique laser technology which enables it
to reduce and speed up production processes of computer components.
The Company operates in the U.S. and operates a development center
in Haifa which employs some 50 people. Its annual sales turnover
totals some $40 million. Among its main customers are Motorola, IBM,
3COM and others. On 6.30.98 Elron held some 36.8% of the Company's
shares, after selling 10% of the shares in April 98 to the giant
communications and software company Losnet in consideration for $10
million. In view of the small weight of the investment in the
exchange ratio valuation and as no information has come to our
knowledge which shows that the updated value of the Company is
different from the value on which the price of the transaction is
based, the value of Chip Express was estimated according to this
transaction at some $100 million. The share of Elron in this Company
is $36.8 million.
Table to be included
e) Mediagate N.V.
Mediagate develops a modem server which will enable direct access to
the Internet from any existing means of communications, including
personal computers, telephones, videophones and fax machines. To
date the Company has not yet registered any revenues whatsoever, and
its products are in the field trial stage prior to their first
sales. It should be mentioned that the Company received initial
orders at a level of some millions of dollars.
Mediagate was valued by us at some $60 million, based on a private
placement carried out in April 1998, according to a company value of
$62 million (out of the money), and based on the transaction on
August 1998 in which Clal Electronic Industries purchased 10% of
Company's shares in consideration for about $22 million (reflects a
Company value of about $60 million). This method was used in view of
the small weight of the Mediagate investment in valuing the exchange
ratio and as no information came to our notice which shows that the
updated value of the Company is different from the value inherent in
the prices of the above-mentioned transactions. Elron holds some 39%
of the Company's shares and therefore the value of its share in the
Company is some $23.5 million.
f) Zoran Corporation
A Company for developing and producing printed circuits. It develops
and markets advanced digital signal processing (DSP), very large
scale integration (VLSI) to compress pictures and voice for
multi-media, and electronic consumption products.
The Company's shares in which Elron holds some 16%, are traded on
the NASDAQ and they have a fairly low level of marketability (the
average daily turnover of some $1.5 million during the period
1-7/98). Therefore, we valued the Company according to its market
value at some $60.8 million (average of the period 9/28-10/8/98).
The value of Elron holdings (some 16.21%) is $9.9 million).
g) Netvision Ltd.
Netvision holds some 50% of the Internet access services market in
Israel and operates additional on-line services including Intranet
and Electronic Trading. The Company has about 60 thousand
subscribers.
In January 1998 Tevel purchased 33.3% of the Company's shares in
consideration for $10 million. The Company has an option program for
its employees, which if exercised, will dilute Tevel's holdings to
about 26.7%. In view of the small weight of the investment in
Netvision in the valuation of the exchange ratio, and as no
information came to our knowledge which shows that the updated value
of the Company is different from the value inherent in the price of
that transaction, the value of the Company was based on this
transaction (fully diluted) at some $37.5 million. Elron's share
(32.33% directly and 25.92% after being fully diluted) totals some
$9.7 million.
D. Ilanot Batucha Investment House Ltd.
1) Background
The importance of Illanot Batucha Investment House Ltd.
(hereinafter: "Illanot Batucha" or "The Company") in valuing the
exchange ratio stems from the difference in the rates of holdings
between the companies as 50% of the shares held are held by Discount
Investments and PEC does not hold any shares in the Company. Illanto
Batucha is engaged in managing securities portfolios, managing
mutual funds and provident funds, coordinating and underwriting
issues and brokerage. In addition the Company manages its Nostro
portfolio. The Company operates in the present structure as of
December 31, 1996 as a result of a merger between Batucha
Securities and Investments Ltd. and "Ilanot - the Mutual Fund
Management of Discount Ltd.". Ilanot-Batucha is a member of the Tel
Aviv Stock Exchange, (hereinafter: "The Stock Exchange"). The
Company employs some 160 people and operates from its head office in
Tel Aviv and 6 branches, of which 2 are in Tel Aviv and branches in
Ramat Hasharon, Haifa, Jerusalem and Kiryat Motzkin.
Recently a transaction was completed in which the Company purchased
for NIS 86 million 100% of the shares of Y.L.R. Capital Markets
(1992) Ltd. which were held by B.D.L. Securities a member of the
I.D.B. Holding Corporation Ltd. Group.
On September 9 1998 a transaction in principle was approved
according to which shares comprising 33.33% of the share capital of
the Company were allocated to Israel Discount Bank Ltd.
(hereinafter: "the Bank"). In consideration for the share
allocation, the portfolio management operations of Tachlit
Consulting and Investment Management Company Ltd. (a subsidiary of
the Bank) will be merged with the portfolio management operations of
the Company, the underwriting activities of Discount Capital Markets
and Investments Ltd. (a subsidiary of the Bank) will discontinue and
will be carried out by the Company and the Bank will invest in the
Company over a period to be agreed upon, the distribution fees which
will be paid it for the distribution of mutual funds in the
management of Ilanot Discount Ltd. and for underwriting operations
which will be carried out in the framework of the Company - with a
change in the existing distribution agreement between the Bank and
Ilanot Discount Ltd.
It was decided, that the consideration for the allocation totaled a
third of the value of the Company as valued by a professional
opinion, and therefore, in the event that the asset value described
above will be lower than that, the Bank will invest the difference
in cash. The transaction is subject to the signature of the detailed
agreements and the approvals as required.
A summary of the Company's financial statements and the structure of
its ownership are attached on the next page.
PAGE 56 TABLE
ILANOT-BATUCHA INVESTMENTS HOUSE LTD.
Summary of Data
(in thousands of shekels of 6/98)
Condensed Consolidated Statements of Income
1-6/98 1-6/97 1997 1996 1995
------ ------ ---- ---- ----
Commissions and consulting revenues 45,690 38,433 84,164 73,547 92,570
Financing revenues 6,525 4,608 11,830 12,181 18,238
------- ------- -------- ------- -------
Total revenues 52,215 43,041 95,994 85,727 110,808
Management fees to holding companies (9,031) (5,637) (9,924) (5,797) (9,785)
Costs and other expenses (43,197) (37,367) (85,608) (84,198) (101,492)
------- ------- -------- ------- -------
Operating earnings (loss) (13) 37 462 (4,268) (469)
Other financing revenues (expenses), net 45 (889) (929) (200) (28)
------- ------- -------- ------- -------
Earnings (loss) before taxes 32 (852) (467) (4,468) (497)
Taxes on income (772) (345) (977) (586) (1,374)
------- ------- -------- ------- -------
Net loss (740) (1,197) (1,444) (5,054) (1,871)
======= ======= ======== ======= =======
Net profit (loss) before management
fees* 3,926 1,613 3,437 (2,430) 2,935
======= ======= ======== ======= =======
* Excluding a management fee of NIS 1 million per year before tax, that were not
added to the earnings as they represent an estimate of certain services given by
the holding companies.
Condensed Consolidated Balance Sheet
6/30/98 12/31/97
------- --------
Current assets 222,035 247,797
Long-term receivables 3,374 3,855
Fixed asset 13,222 11,479
------- --------
Total 238,631 263,132
======= =======
Current ratio 2.32 2.07
Current liabilities 95,794 119,642
Tax provision 213 124
Shareholder's equity 142,624 143,366
------- --------
Total 238,631 263,132
======= =======
Financial leverage None None
- ---------------------------------------
Ownership structure as at 19/8/98 (%):
Discount Investments 50
Clal Capital Market 50
---
100
===
- ---------------------------------------
* A company within the Clal (Israel) Group.
2) Financial Analysis
a) Revenues and Profitability
Ilanot-Batucha is engaged, as mentioned, in a range of operations in
the capital markets. In 1997 the Company's net earnings before
management fees to the holding company totaled about NIS 3.4 million
as compared with net loss as mentioned totaling some NIS 2.4 million
in 1996 and net earnings of about NIS 2.9 million in 1995(1).
The following are details regarding the structure of the Company's
profitability:
(1) Revenues from commissions and consulting
1997 1996
NIS thousand % NIS thousand %
------------ --- ------------ ---
Management of mutual funds
and provident funds 49,248 59 40,095 55
Commissions from managing
clients portfolios 30,612 36 29,616 40
Distribution and underwriting
commissions 3,320 4 3,248 4
Consulting 984 1 588 1
------------ --- ------------ ---
84,164 100 73,547 100
------------ --- ------------ ---
The Company manages through a subsidiary in Ilanot Discount Ltd. 39
mutual funds, whose total assets as at December 31, 1997 reached
some NIS 3.5 billion, which is about 70% of the volume of the funds
assets in Israel. The volume of the assets on June 30, 1998 totaled
some NIS 3.7 billion which is about 14.3% of total funds assets in
Israel. The Company's revenues from this source are from management
fees (at a rate of 0.25% - 0.75% per year) and a rate of increase
(0.25% - 1.5%) collected from the purchasers of units at the time of
their acquisition (in some of the funds, the purchase of units is
exempt from this addition). The Company significantly increased its
market share in 1997 (from about 14% to about 17%) due to the
success of its shekel mutual fund. The level of revenues between
this fund is lower than the level of revenues from other funds.
Moreover, the Company managed through its subsidiary (100%) Ilanot
Batucha Provident Ltd., 8 provident and severance pay funds. The
size of the provident and severance fund is estimated at some NIS
0.3 billion.
On August 16, 1998, an agreement was signed between the Company and
Clal Insurance Company Ltd., according to which the Company will
sell all its holdings in Ilanot Batucha Provident in consideration
for NIS 3,750
- ----------
(1) All the financial data for the period 12/31/96 include the data of the two
merging companies (basis pooling of interests)
thousand linked to the consumer price index of May 1998, plus the value of
the surplus assets, net, of Ilanot Batucha Provident. The total
consideration, less tax applying to the transaction is estimated at some
NIS 4.4 million as compared with the negative market value of the
investment totaling some NIS 0.9 million.
Managing customers portfolios is carried out in the Company itself, mainly
through external portfolio managers or by the clients. The Company's
revenues in this field are a purchase and sales commissions (0.2% - 0.7%
of the transaction price) and guardianship fees (up to 0.1% of the average
value of the portfolio). Clients whose files are managed by the Company
pay, in addition, management fees at a rate of up to 2.4% pa. The average
rate of commissions is half of the above mentioned ceiling. The volume of
the portfolio assets in June 1998 totaled some NIS 2.4 billion.
Operations in the underwriting field are carried out through a subsidiary
(100%) Ilanot Batucha Underwriting Ltd.
On July 21, 1998 an agreement between the Company (through a subsidiary)
and Clal Capital markets went into effect, according to which Clal Issuers
(a company wholly owned by Clal Capital Markets) will cease operations in
the underwriting field and will transfer them to the Company in
consideration for NIS 4.9 million. Concurrently, Clal (Israel) Ltd.
undertook with regard to itself and regard to its wholly owned
subsidiaries, that for a period of 4 years it will not compete with the
Company in the field of underwriting.
For the period January - June 1998 revenues from commissions and
consulting totaling NIS 45,690 thousand which are an increase of some 19%
as compared with equivalent period in the previous year (NIS 38,433
thousand).
2) Financing revenues, net
Composition:
1997 1996
---- ----
NIS thousand
------------
Earnings from marketable securities 5,724 7,301
Interest from shekel deposits 4,119 1,806
Interest from clients(1) 1,636 2,019
Companies in the Clal Group, net (408) 766
Others 759 289
------- -------
11,830 12,181
======= =======
(1) The Company usually grants its clients unlinked credit and issues
guarantees for them to secure their liabilities to third parties
During the first half of 1998 net financing revenues increased at a rate
of about 42% and aggregated some NIS 6,525 thousand, as compared with
about NIS 4,608 thousand in the previous year.
65
3) Costs and expenses
Composition:
1997 1996
---- ----
NIS thousand
------------
Wages and salaries 30,261 35,325
Rent and maintenance of office 13,554 12,082
Management fees to parent companies(1) 9,924 5,797
Commissions and management fees to
banks(2) 12,154 8,689
Computer services 9,010 9,369
Commissions and levies to Stock Exchange 5,802 4,473
Professional services 2,793 2,769
Advertising, marketing and public relations 7,429 3,896
Others 4,605 7,595
------ ------
95,532 89,995
====== ======
(1) Management fees in the past were close to the net earnings.
(2) Bank Discount is a banker which is the main distributor of most of
the funds, its clients hold a considerable part of the investments
managed by the Company. Bank Discount receives commissions for the
distribution of these units at a rate of 50% of the rate of increase
collected from the purchasers of the units through it, and not less
than 0.25% of their price. In addition, the Bank receives
distribution commissions at a rate of 0.5% pa. from the average
volume of the assets of those finds.
During the first half of 1998 costs and expenses totaled NIS 52,228
thousand, which is an increase of 21% as compared with equivalent period
in the previous year.
4) Taxes
The Company and three of its subsidiaries are financial institutions and
the tax rate on their revenues is 45.3%.
The Company has losses for tax purposes of considerable amounts for which
it does not carry out a tax allocation in view of the opinion of its
managers that such set-offs are not likely in the near future.
b) Balance Sheet Analysis
Current assets as at June 30, 1998 include mainly liquid assets, of which
investments in marketable securities (most of them in Maof shares) of NIS
119.8 million and a short-term deposit (mortgaged to the Maof Clearing
House) totaling some NIS 34.9 million. Fixed assets, totaling some NIS
13.2 million including mainly office equipment and vehicles.
Most of the current liabilities are unlinked loans from companies in the
Clal Group totaling NIS 53.3 million which bear interest at a rate of
12.46%-14.4%. Moreover, the Company has liabilities relating to Maof
options of some NIS 22.5 million. Shareholders equity as at June 30, 1998
totaled about NIS 142.6 million (about NIS $38.9 million), which comprise
about 60% of the total balance sheet.
66
3) Evaluation
The best method from a theoretical point of view to value companies
operating as going concerns, is the discounted cash flow method.
Nevertheless, this method is not suitable in our opinion to value Ilanot
Batucha, due to the considerable difficulty in forecasting its cash flows,
in view of the character of the branch in which it operates - the capital
markets, which is a branch with many changes, and fluctuations in its
revenues are very considerable. Moreover, the Nostro operations
contributed considerably to the Company's profits in recent years. These
characteristics are also similar to other companies operating in the
capital markets field. Therefore, we estimated the value of Ilanot
Batucha's operations in the capital markets by a comparison of multipliers
of shareholders equity of a number of companies operating in the branch
and traded on the Stock Exchange. The average capital multiplier of the
above companies which are characterized by a range of fields of activities
similar to those of Ilanot Batucha is some 1.2-1.3. A summary of the
comparative data appears in table 4 on page 67. In view of the advantages
of size(1) compared to the average comparative group, we think that a
capital multiplier suitable for the Company ranges between 1.4-1.5. The
value of the investment in Ilanot Batucha Provident was valued according
to a selling price to Clal Insurance less tax according to the transaction
in August, 1998.
An additional indication to the capital multiplier suitable for the
Company can be found in the transaction of the purchase of Y.L.R.
described above. Y.L.R's shareholders' equity on 6/30/98 totaled some NIS
55 million and therefore this transaction embodies a multiplier of
shareholders equity of 1.56.
The following is the composition of the estimated value:
Balance
sheet Economic
value value
----------- -----------
(NIS millions)
-------------------------
Values of operations in the field
of the capital market 143.5 200.9-215.3
Value of the investment of
Ilanot Batucha Provident (0.9) 4.4
----------- -----------
142.6 205.3-219.7
Value in millions of dollars as at 6.30.98 38.9 56.0-59.9
=========== ===========
- ----------
(1) Therefore, for example, the average revenues from services in the group of
comparative companies (excluding Gachelet) stands at some NIS 8.5 million
during the period 1-6/98, and some NIS 19.9 million for 1997 as compared
with about NIS 45.7 million and about NIS 84.2 million respectively, for
Ilanot Batucha.
67
PAGE 61 TABLE
INDICATORS FOR VALUE MULTIPLIERS OF COMPANIES OPERATING IN THE CAPITAL MARKETS
WHOSE SHARES ARE TRADED ON THE STOCK EXCHANGE
Average Market Value Own Equity Multiplier Net Earnings Earnings Multiplier
(According to 1997 earnings)
-------------------- --------------------- ------------- ----------------------------
Own Equity 9/8/98- 9/8/98- 9/8/98- ? in the
As at 10/8/98 7-9/98 10/8/98 7-9/98 1997 1-6/98 10/8/98 7-9/98 Stock Exchange
6/30/98 -------------------- --------------------- ------------- -----------------------------------------
($ Million) ($ Million) ($ Million)
Company Name
Analyst* 19.0 19.9 26.1 1.0 1.4 3.9 1.1 5.1 6.7 ?
Excellent 10.7 13.6 14.6 1.3 1.4 1.2 0.5 11.2 12.1
Gachelet 24.4 31.8 38.9 1.3 1.6 3.4 2.3 9.4 11.4 ?
Dovrat Shrem
Investments 8.4 13.6 14.9 1.6 1.8 1.4 0.5 9.9 10.8
Merkazit securities 19.4 18.3 20.1 0.9 1.0 1.3 0.1 14.3 16.0
Nessuah 11.5 11.8 12.2 1.0 1.1 1.2 (0.2) 9.7 10.0
Sahar Securities** 13.3 14.4 14.4 1.1 1.1 1.3 0.6 8.6 10.4
Arrithmetic average 1.2 1.3 9.7 11.1
Weighted average to 1.2 1.3 9.0 10.4
size of equity
* Due to the existence of securities valued at NIS 27.6 Million presented in
financial statements at their value (fixed investment), while the market
value is greater than the book costs by about NIS 8.8 million, shareholders
equity in the Table was increased by about $2.4 million, as compared to the
equity in the financial statements as at 6.30.98
** The value is fixed based on the sale transaction of 70% of the equity and
75% of the voting rights to Gmul Investment Company in August 1998 in
consideration for the equity plus NIS 2.8 million (a total consideration
about 10.1 million dollars). It should be emphasized that we did not consider
value of the controlling interest in this deal.
68
E. General indications in the field of the Value of Cellcom (Israel) Ltd.
which is not a valuation
1) Background
Cellcom is in the process checking the possibility to carry out an initial
issue of its shares to the public in the US. In accordance with the rules
in the U.S. there are limitations on the publication of data and
evaluations regarding a Company which intends to make an issue (Cellcom)
before carrying out the issue process to the public.
In view of the aforesaid, we were directed by those who ordered this work,
that when determining the exchange ratio a valuation of Cellcom should not
be performed, but to use general indications only for the value of this
Company, which was based on a comparison of acceptable value multipliers
of similar cellular phone companies abroad, on analysts reports published
regarding Cellcom and on the financial statements of Cellcom published to
the public.
We should state that the investments of Discount Investments and PEC in
Cellcom are material to their economic value, but have little effect on
the exchange ratio due to identical holdings in this Company.
In view of the instructions we received, we did not carry out a valuation
and we did not apply all the other procedures regarding this investment.
The following is a description of the method of determining the general
indication of the value of Cellcom used for the purpose of calculating the
exchange ratio.
2) A comparison of the acceptable multiplier value of similar cellular
companies abroad.
For the purpose of calculating the indication for the value of Cellcom we
chose to relate to a group of six cellular companies in Europe. We should
mention that in our estimate the comparison of the cellular market in the
U.S. is less relevant for a number of significant reasons:
o The method of payment acceptable in the US is "the cellular
subscriber pays". i.e., the payment for an incoming call is imposed
on the recipient and therefore many subscribers tend to close the
instrument (or use a beeper to receive a warning of the requested
call) and thereby reduce the use of the cellular telephone. On the
other hand, in Europe and Israel the method of "the person
contacting pays", which encourages the use of cellular telephones.
o The deployment of cells in many areas in the US are considerably
limited as compared with Europe and Israel so that the sound quality
is lower which reduces the demand for the service.
o The US has a fairly high proportion of old analog networks, which
have a limited potential for advanced services. On the other hand,
in Europe most of the suppliers use digital technology and in Israel
today all the suppliers use
69
digital technology (including Pelephone which is shortly to launch a
CDMA network with a capacity of about 1 million subscribers).
o In a number of areas in the U.S. the rate of subscribers
relinquishing their line is considerable (up to about 30% in certain
areas), while the extent of relinquishing and the transfer between
companies in Israel is a few percent only. The cost of relinquishing
in the U.S. is lower, among other things because in many cases there
is no need to change the instrument (there is no compulsory
installation of a hand-free appliance in the vehicle) and because
there is no need to exchange the number in a transfer between
supplier, contrary to what is acceptable in Israel.
In view of the difference in the structure of the cellular market in the
U.S. and Europe, and as the market in Israel is more similar to the
European market, a sample of European cellular companies which are traded
both on the European and U.S. stock exchanges was chosen.
For the purpose of calculating the indication we calculated two types of
acceptable multipliers to cost cellular companies: The multiplier of the
value per subscriber and the multiplier per EBIDTA.
The following is data regarding six companies taken for the purpose of
comparison.
Company value multipliers
-------------------------
Estimate of
No. of Average
Traded on subscribers Company No. of
stock Q4/1998(1) value(2) To subscribers
Company Country exchange (thousand) ($ million) EBITDA(3) Q4/1998
- ------- ------- -------- ---------- ----------- --------- -------
Netcom Norway Oslo 487 1,338 16.4 2,746.2
Europolitan Sweden Stockholm 529 3,096 20.4 5,858.1
Telcel Portugal Lisbon 954 2,455 9.6 2,572.2
Tim Italy Milan 10,923 39,757 11.8 3,639.6
Vodophone Britain NASDAQ, 5,550 34,125 18.7 6,148.6
London
Stet Hellas Greece NASDAQ 524 1,994 12.1 3,802.8
Amsterdam
---- -------
Average 14.8 3,190.2(4)
==== =======
- ----------
(1) Source: Average reports of analysts who review the companies
(2) Value of the company (Enterprise Value) according to the rates of the
shares during the period 9/28-10/8/98
(3) Based on EBITDA (operating profit before depreciation and amortization)
expected for 1998 according to an average forecast of analysts who
reviewed the companies.
(4) Average does not include extraordinary multipliers of Europolitan (which
is likely to be affected by the potential growth in the number of
subscribers resulting from the low market share of the company compared to
comparative groups and the expectations of its increase) and Vodaphone
(which is likely to be effected by the potential growth of the number of
subscribers resulting from its shares in companies and cellular developers
outside Britain).
70
For the purpose of obtaining an indication of the value Cellcom from these
multipliers we use the data of EBITDA of Cellcom for the first half of
1998, grossed up on an annual basis and an estimate of the average number
of subscriber in 1998 according to known data at the date of preparing the
work. From the value of the Company we deducted the net financial
liabilities as at 6/30/98 in order to receive an indication of the value
of its shareholders equity. The basic indication of the value of Cellcom
according to the multiplier of the value per subscriber is NIS 10,176
million, and according to the EBITDA some NIS 10,860 million.
In addition, in view of the fact that the investment in Cellcom is not
marketable and not liquid, while the shares in the comparative group are
marketable, we deducted 15%-25% from the basic indication calculated in
order to reflect the difference between Cellcom and the comparative group.
The range of the rate of discount estimated is based on researches carried
out on this matter mainly in the U.S.(1) and on the characteristics of
investments of Discount Investments and PEC in Cellcom. Most of the
researches are engaged in a comparison of the price in which private
transactions are carried out in block shares for identical share prices in
the same day in the stock exchange. From these researches we can see that
the rate of discount is liable to range in a wide field between a few
percentages up to 85%. The rate of discount increases as long as the
marketability of the share is lower. On the other hand, as long as the
investor in the blocked shares can have control and influence the company,
and as long as the company is larger and more stable, the discounted price
is smaller. In the case before us the share is not marketable at all (a
factor which increased the rate of discount required), but Cellcom is a
Company with a fairly large volume of operations and profitability and has
high financial stability. Moreover, Discount Investments and PEC have a
significant influence on Cellcom (factors which operate to reduce the rate
of discount).
On the basis of the above principles the indication for the value of
Cellcom according to a multiplier of the value of per share is in the
range of NIS 7,632 - NIS 8,650 million, and the indication to the value
according to the EDBITDA multiplier is in the range of NIS 8,145 - NIS
9,230 million.
3) Additional indications regarding the value of Cellcom according to the
reports of analysts who reviewed Discount Investments
In addition to the comparison with cellular companies in Europe as an
additional indication to the value of Cellcom, the following are updated
values to the value of Cellcom published in the analysts reports:
Investment House Date of valuation Value of Cellcom
- ---------------- ----------------- ----------------
(NIS million)
Sahar 8.23.98 7,000
Ofek 9.8.98 4,438
Lehman Brothers 9.14.98 7,675
- ----------
(1) See a leading article in the field:
Silber William L. "Discounts on Restricted Stock: The Impact of liquidity
on Stock Prices" Financial Analysts Journal, July-August, 1991, pp 60-64.
71
Ilanot Batucha 9.17.98 5,400
Bank Hamizrahi 9.24.98 4,100
Metav 9.28.98 5,000
-----
Average 5,602
=====
72
4) Summary of the indications of the value of Cellcom for the purpose of the
valuation of the exchange ratio
NIS million
Indication of the value of Cellcom
according to the multiplier value of a
subscriber(1) 7,632-8,650
Indication of the value according to the EBITDA
multiplier(1) 8,145-9,230
Indication of the value according to analysts' values 5,600
Average indication of the value 7,476
=====
- ----------
(1) Taking into account the discount of 15%-25% from the basic indication due
to the lack of marketability and the lack of liquidity of the investors in
Cellcom as compared with a comparative Group.
73
APPENDICIES
74
Appendix No. 1
Structure of holdings in Discount Investments before and after the merger
Discount Investments
------------------------- ------------------------
Before the transaction After the transaction
------------------------- ------------------------
Shares of NIS Rate of Shares of NIS Rate of
1 par value holding 1 par value holding
---------- ------ ---------- ------
IDB Development 15,404,752 54.29% 32,795,345 71.66%
Others 12,972,341 45.71% 12,972,341 28.34%
---------- ------ ---------- ------
28,377,093 100.00% 45,767,686 100.00%
========== ====== ========== ======
PEC
Shares of Rate of The number of shares of
$1 par value holding Discount Investments which
will be issued to IDB
Development:
17,390,593
IDB Development 14,937,792 81.35%
Others 3,424,396 18.65%
---------- ------
18,362,188 100.00%
========== ======
The exchange ratio of the net assets of Discount Investments as compared with
value of the net assets of PEC 1.327.
75
APPENDIX NO. 2
A. Comparing level of marketability of Shares of Discount Investments and
PEC.
B. Development of ratio of value of Discount Investments according to share
prices on the stock exchange.
[GRAPHS OMITTED]
76
APPENDIX NO. 3
OPINION OF APPRAISER MR. ALFRED IRANI
[LETTERHEAD OF A. IRANI CIVIL ENGINEER REAL ESTATE APPRAISER
October 15, 1998
Our ref.: 98-1447A
Prof. Itzhak Swary,
Itzhak Swary Ltd.,
3 Daniel Frisch Street,
Tel Aviv.
Dear Sir,
RE: ESTIMATE OF VALUE OF RIGHTS IN REAL ESTATE ASSETS
OWNED BY COMPANIES IN THE PROPERTY & BUILDINGS
CORPORATION LTD. GROUP
1. I was requested by you to estimate the value of the rights in a list of
properties presented to me, belonging to various companies, as detailed in
Appendix A' attached hereto.
2. The value estimates appearing in Appendix A' are based on data included in
prospectuses and in the Immediate Reports which public companies in the
Group published, as detailed in Appendix B' of the data, and
clarifications given to us by the Property & Building Corporation Ltd.
through you, including:
- Details of the property.
- Location of the property.
- Areas of land and of buildings.
- Purpose (use) of the property.
- Legal state.
- Rent from revenue producing assets.
In addition we were given data and details regarding rights of K.B.A.
Ltd., detailed in an Appraisers Opinion handed to us dated August 15,
1997. I should state that I did not rely on the value mentioned in that
Opinion for the purpose of my Opinion.
3. I must point out that the attached value estimates are not an Appraiser's
Opinion pursuant to the provisions of the Land Appraisers Regulations, as
we did not carry out some of the obligatory procedures required for a
full Appraisers Opinion. (We did not visit the sites of the properties or
the Local Planning and Building Committees connected with these
properties).
4. We were not presented with documents relating to ownership/leasehold
rights in the real estate.
5. Regarding the properties under construction, we based ourselves on the
actual state of construction, according to data we received from the
companies' representatives.
6. Estimates of the value were checked according to the three usual
approaches in real estate appraisals:
- The comparative approach.
- The cost approach.
- The revenues approach.
Each property was valued according to the most suitable approach for it.
Furthermore:
6.1 A property which can be compared with properties sold in the area,
the value was checked using the comparative approach. This method
was used to value most of the properties, including properties of
the type detailed in clauses 6.2, 6.3 below.
6.2 A property under construction, was values using the cost approach,
i.e. the value of the land plus actual building costs and plus
promoter's profit.
6.3 The value of revenue producing properties was checked using the
discounting of revenues approach.
7. The main parameters used in determining the value of the rights are as
follows:
a. Discount rate used for the purpose of determining value based on the
revenues approach was taken in accordance with the type of property
and ranged between 9.5%-11.0%. The discount rate for every property
was determined according to the level of demand in the market for
the type of property valued in that area, the existing level of
rental occupancy, the connection between the rent received from
similar properties and similar selling prices, and the level of risk
existing in the rent received from the property. The lower the level
of risk, the lower the discount rate.
b. In valuing large sites in all types of properties, both revenue
producing properties, offices and commercial areas, projects for
residential purposes and vacant land, (1O-30)% were deducted from
the basic value.
Factors affecting the discount:
Position of the property and the area in which it is situated.
Existing level of activities in the area for that type of property.
Area of the property - land and attachments (taking into account
their age).
Existing demand in the area for similar properties.
Revenue producing properties - rate of occupancy and periods of
rental.
c. The discount taken into account in clause b above, including the
effects of the delay factor in certain real estate on their value.
8. The properties valued, are detailed in Appendix A divided into groups
according to the holding company, the type of property and its condition,
properties whose value is higher than 5% of the value of all the real
estate properties of Property & Building have been stated separately.
9. I agree that this Opinion of mine be mentioned and/or included in your
Opinion which will be included in the Immediate Reports to be be published
regarding the exchange transaction between I.D.B. Development Corporation
Ltd. and the Discount Investments Corporation Ltd.
10. I hereby declare that I have no personal interest or share in the said
property and that this evaluation is prepared according to the best of the
my professional knowledge, understanding and experience.
Yours sincerely,
(-)
--------------------------------
A. Irani,
Engineer & Real Estate Appraiser
Attached: Appendix A - Details of value estimates according to property
summaries.
Appendix B - List of prospectuses and Immediate Reports used as a
source for the valuation of the real estate.
PROPERTY AND BUILDING AND 100% OWNED SUBSIDIARIES
Summary of properties
(The balance sheet value and rental are in NIS thousands of June 1998)
Revenue-Producing Properties
Balance Appraiser's
Units Built Rented value Value
under up area area Rate of 6.30.98 Rent 1-6/98 Monthly rent 10.15.98
construction in sq. m. in sq. m. Occupancy (NIS '000) (NIS '000) Per sq. m.(NIS) (NIS '000)
------------ --------- --------- --------- --------- ----------- --------------- ----------
Center-commercial & offices (1) 35,754 32,618 91%(1) 121,539 11,548 59 260,174
Center - for rent, commercial and
residence under construction 66 8,000 0% 7,621 53,172
South & Jerusalem -Commercial 1,783 1,783 100% 2,897 401 22 8,031
Profit not yet realized related to
revenue producing properties (570)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 66 45,537 34,401 76% 131,487 11,949 58 511,377
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes revenue-producing properties under construction, at finishing
stage, where 50% of it has been rented. Rate of occupancy in other
properties is about 100%. Calculation of rental per sq. m does not include
this asset.
Real Estate Appraiser's Value
Book As at 10.15.98
Location/Region (NIS '000) (NIS '000)
- --------------- ---------- --------------
- ----------------------------------------------------------------------------
Total 8,307 83,074
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Residential Construction in Process
NIS thousands
------------------------------
Land Appraiser's Total
The share Value as Initiative Construction economic
of the land Construction at 10.15.98 profit costs value
Region Costs In Costs Advances Net Units NIS '000 NIS '000 NIS '000 NIS '000
- ------ ----- -------- -------- --- ----- -------- -------- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
Center 16,719 4,801 18,349 (1,630) 112 20,169 2,054 11,918 34,140
- ------------------------------------------------------------------------------------------------------------------------------------
Inventory of Apartments
Balance sheet Appraiser's Value
Value As at 10.15.98
Region Units (NIS '000) (NIS '000)
- ------ ----- ---------- ----------
- ------------------------------------------------------------------------------
Center 10 4,919 6,782
- ------------------------------------------------------------------------------
* Herzliya's center A+B, Nachalat Beit HaShoeva properties, Shadar and the
new Em Hamosahavot Hatsafon.
** Appraiser's values, plus cost of construction and estimated initiative
profit.
Summary of properties
(The balance sheet value and rental data are in NIS thousands of June 1998)
Revenue Producing Properties
Rate of Rented Balance value
Holding in Built up area area Rate of 30.6.98
the Company in sq. m. in sq. m. Occupancy (NIS `000)
----------- --------- --------- --------- ----------
Herzliya* 64.70% 48,894 45,960 94% 92,840
South -- industrial & commercial** 64.70% 44,211 40,401 91% 27,386
Center - offices and commercial 64.70% 101,180 90,727 90% 140,443
North-offices, industrial & commercial 64.70% 122,371 110,463 90% 198,987
Original difference related to?? 64.70% 1,695
- ---------------------------------------------------------------------------------------------------------------
Total 316,656 287,551 91% 461,351
- ---------------------------------------------------------------------------------------------------------------
Monthly rent Appraiser's Value
1-6/98 Monthly rent As at 15.10.98
(NIS '000) Per sq. m. (NIS) (NIS '000)
---------- ---------------- ----------
Herzliya* 10,700 39 185,184
South -- industrial & commercial** 5,350 22 85,863
Center - offices and commercial 16,631 31 270,038
North-offices, industrial & commercial 17,734 25 270,258
Original difference related to?? 0
- ---------------------------------------------------------------------------------------------
Total 49,415 29 811,342
- ---------------------------------------------------------------------------------------------
* 26,252 sq. m. in a capitalized lease and 22,642 sq. m. ownership, which
are intended for commercial and industrial (High-Tech).
** Includes 25% of the Science Industries Park properties.
Revenue- Producing Properties under Construction
Balance value Appraiser's Value
Rate of Project area 30.6.98 As at 10.15.98
holding Sq. M. (NIS '000) (NIS '000)
------- ------ ---------- ----------
Center-offices, commercial,
industrial & storage 64.70% 67,760 74,561 170,882
North -- industrial & commercial 64.70% 9,519 8,178 14,668
Miscellaneous -- future planning 64.70% 568 0
Capitalizing finance 64.70% 967 0
- -----------------------------------------------------------------------------------------------
Total 77,279 84,274 185,550
- -----------------------------------------------------------------------------------------------
Vacant land available for erecting Revenue- Producing Properties
South 64.70% 66,050 17,668 18,702
Center 64,70% 112,882 143,555 56,545
North 64.70% 120,634 46,098 45,104
Land earmarked for public areas 64.70% 43,849 3,062 0
- -----------------------------------------------------------------------------------------------
South - industrial 343,415 210,383 120,351
- -----------------------------------------------------------------------------------------------
GAV-YAM
Summary of Properties
(The balance sheet value and rental data are in NIS thousands of June 1998)
Real Estate
Rights in the Land
Commercial Balance Sheet Appraiser's Value
Rate & Vacation Value as at 6.30.98 As at 10.15.98
Location/Region Of Holdings Units (Dunam) (NIS'000) In NIS'000
- --------------- ----------- ----- ------- ---------- -----------
South 64.70% 240 1,947 14,301
Center 64.70% 262 41,527 96,809
North 64.70% 234 183 18,843 80,491
- ---------------------------------------------------------------------------------------------------------------------
Total 736 183 62,317 191,600
- ---------------------------------------------------------------------------------------------------------------------
Residential Construction in Process NIS thousands
Rate of Units The share
Holdings in Under of land
Region Company Construction Costs in costs Advances Net
- ------ ------- ------------ ----- -------- -------- ---
Kiriat Motskin-Neve Ganim 64.70% 230 110,884 15,555 44,044 66,840
Center 64.70% 72 33,336 11,412 13,840 19,496
- --------------------------------------------------------------------------------------------------
Total 302 144,220 26,967 57,884 86,336
- --------------------------------------------------------------------------------------------------
Land
Appraiser's Value Initiative Costs of Total
As at 10.15.98 profit construction economic value
Region In NIS'000 NIS'000 NIS'000 NIS'000
- ------ ----------- -------- -------- --------
Kiriat Motskin-Neve Ganim 42,171 4,217 95,329 141,717
Center 26,659 1,320 21,923 49,902
- -----------------------------------------------------------------------------------
Total 68,830 5,537 117,252 191,619
- -----------------------------------------------------------------------------------
* Appraiser's values, plus cost of construction and estimated initiative profit.
Inventory of Apartments
Rate of Balance Appraiser's Value
Holdings in Sheet value As at 10.15.98
Region Company Units (NIS '000) In NIS '000
- ------ ------- ----- ---------- -----------
- --------------------------------------------------------------------------------------
Kiriat Motskin-Neve Ganim 64.70% 37 19,153 22,515
- --------------------------------------------------------------------------------------
HADARIM PROPERTIES
Summary of Properties
(The balance sheet value and rental data are in NIS thousands of June 1998)
Revenue Producing Properties
Rented Balance value
Rate of Built up area area Rate of 30.6.98
Holding in sq. m. in sq. m. Occupancy (NIS `000)
------- --------- --------- --------- ----------
Center - Offices 2,400 2,400 100% 3,674
Jerusalem-industry & offices * 6,929 6,929 100% 5,020
- -----------------------------------------------------------------------------------------------------------------
Total 90.00% 9,329 9,329 100% 8,694
- -----------------------------------------------------------------------------------------------------------------
Appraiser's Value
Monthly rent 1-6/98 Monthly rent As at 15.10.98
(NIS `000) Per sq. m. (NIS) (NIS `000)
---------- ---------------- ----------
Center Offices 437 61 13,055
Jerusalem-industry & offices * 1,329 64 22,735
- ---------------------------------------------------------------------------------------------------
Total 1,766 61 35,790
- ---------------------------------------------------------------------------------------------------
Includes 25% of the Science Industries Park.
Revenue Producing Properties under construction
Balance value Appraiser's Value
Rate of Project area 30.6.98 As at 15.10.93
Region Holding (sq. m.) (NIS `000) (NIS `000)
- ------ ------- -------- ---------- ----------
- ------------------------------------------------------------------------------------------------------
Center & Jerusalem - offices and
commercial 90.00% 12,810 59,339 67,840
- ------------------------------------------------------------------------------------------------------
Vacant Land
- ------------------------------------------------------------------------------------------------------
North 90.00% 337,400 12,042 91,675
- ------------------------------------------------------------------------------------------------------
NAVE
Summary of Properties
(The balance sheet value and rental data are in NIS thousands of June 1998)
Real Estate
Rights in the Land
-------------------------------------------------------------
Balance Sheet
Value as Residence Area with Commercial Vacation & Appraiser's Value
Rate at 6.30.98 Area no Zoning area Parking area as at 10.15.98
Location/Region of Holdings (NIS '000) (Dunam) (Dunam) Units (built sq. m.) (built sq. m.) In NIS '000
- --------------- ----------- ---------- ------- ------- ----- -------------- -------------- -----------
- ------------------------------------------------------------------------------------------------------------------------------------
Center 90.00% 212,345 36+ 12+ 512+ 350+ 3,130 255,553
- ------------------------------------------------------------------------------------------------------------------------------------
Residential Construction in Process
NIS thousands
------------------------------------------- Land Addition of
Rate of The share Appraiser's Value Cost of initiative Total
Holdings in of land As at 10.15.98 construction profit economic value
Region Company Costs in costs Advances Net Net In NIS '000 NIS '000 NIS '000 NIS '000*
- ------ ------- ----- -------- -------- --- --- ----------- -------- -------- ---------
- ------------------------------------------------------------------------------------------------------------------------------------
Center 90.00% 87,434 34,828 54,915 32,519 86,336 78,107 52,606 4,366 135,079
- ------------------------------------------------------------------------------------------------------------------------------------
Inventory of Units
Rate of Balance sheet value Appraiser's Value
Holdings in as at 6.30.98 As at 10.15.95
Region Company Units (NIS '000) (NIS '000)
- ------ ------- ----- ---------- ----------
- --------------------------------------------------------------------------------------
Center 90.00% 15 13,632 17,455
- --------------------------------------------------------------------------------------
* Appraiser's values, plus cost of construction and estimated initiative
profit.
GAD
Summary of Properties
(The balance sheet value and rental data are in NIS thousands of June 1998)
Revenue Producing Properties
Rate of Area Balance value
Holding in Built up area Rented Occupancy 30.6.98
the Company in sq. m. in sq. m. Rate (NIS '000)
----------- --------- --------- ---- ----------
Office center 90% 1,980 1,980 100% 5,330
Jerusalem -Industrial 90% 4,800 3,600 75%
Other 90% 255 0 0 431
- -----------------------------------------------------------------------------------------------
Total 7,035 5,580 79% 5,761
- -----------------------------------------------------------------------------------------------
Appraiser's Value
Monthly rent 1-6/98 Monthly rent As at 15.10.98
(NIS '000) Per sq. m. (NIS) (NIS '000)
---------- ----------------- ----------
Office center 925 78 16,685
Jerusalem -Industrial 245 11 11,624
Other 0 0 3,539
- -----------------------------------------------------------------------------------------------
Total 1,170 35 33,848
- -----------------------------------------------------------------------------------------------
Revenue Producing Properties under construction
Balance value Appraiser's Value
Rate of 30.6.98 As at 15.10.98
Holding (NIS '000) (NIS '000)
------- ---------- ----------
- --------------------------------------------------------------------------------
Jerusalem 90% 25,112 34,103
- --------------------------------------------------------------------------------
Real Estate
Rate of Balance value Appraiser's Value Cost of Total
Holding in 30.6.98 As at 15.10.98 Construction economic value
Location/Region the Company (NIS '000) (NIS '000) NIS '000 NIS '000
- --------------- ----------- ---------- ---------- -------- --------
Jerusalem ** 90% 140,547 78,657 79,002
Center *** 90% 70,012 137,329 17,033 154,362
For the purpose of the consolidated -
canceling interest capitalization -6,826
Original difference in properties and building
for Gad 476
- --------------------------------------------------------------------------------------------------------------------------------
Total 90% 204,209 215,986 17,033 233,364
- --------------------------------------------------------------------------------------------------------------------------------
* Assessed value plus cost of building of project in process of being built.
** Including properties in a consolidated company of Gad, held at a rate of
67%. The economic value including Appraiser's value and properties not
assessed by the Appraiser and taken at the balance sheet value in the sum of
NIS 345 thousand.
*** Includes properties in consolidated company of Gad, held at the rate of 75%.
Residential Construction in Process NIS thousands
Rate of The share
Holding in Units under of the land
the Company Construction Costs Costs Advances Net
- ----------------------------------------------------------------------------------------------------------
Jerusalem 22 14,286 5,154 11,512 2,774
- ----------------------------------------------------------------------------------------------------------
Appraiser's Value Building Total
As at 15.10.98 Daily profit cost economic value
Finish rate NIS '000 NIS '000 NIS '000 NIS '000
- -----------------------------------------------------------------------------------------------------------------------
Jerusalem 12,468 403 9,132 22,003
- -----------------------------------------------------------------------------------------------------------------------
Inventory
Rate of Type of Balance value Appraiser's Value
Holding in Ownership 30.6.98 As at 15.10.98
the Company (ownership/lease type) Units (NIS '000) NIS '000
- ----------------------------------------------------------------------------------------------------
Jerusalem 90% 1 284 789
- ----------------------------------------------------------------------------------------------------
* Appraiser's value, plus to the cost of building and estimated daily profit.
ISPRO
Summarization of properties
(The balance sheet value and rental data are in NIS thousands of June 1998)
Revenue Producing Properties
Rate of Area
Holding in Built up area Rented Occupancy
the Company in sq. m. in sq. m. Rate
----------- --------- --------- ----
South - industry 70.46% 60,879 51,124 85%
Center - offices and commercial 70.46% 567 484 85%
Center - industry* 70.46% 28,910 28,200 98%
Original difference related to ?? 70.46%
- ------------------------------------------------------------------------------------------------
Total 90,356 79,808 88%
- ------------------------------------------------------------------------------------------------
Balance value Appraiser's Value
30.6.98 Monthly rent 1-6/98 Monthly rent As at 15.10.98
(NIS '000) (NIS '000) Per sq. m. (NIS) (NIS '000)
South - industry 57,761 3,985 13 88,668
Center - offices and commercial 3,911 469 162 8,324
Center - industry* 42,203 4,127 24 69,673
Original difference related to?? -9,958 0 0
- ----------------------------------------------------------------------------------------------------------------
Total 93,917 8,581 18 166,665
- ----------------------------------------------------------------------------------------------------------------
* Includes asset owned by a consolidated company of ISPRO (74%)
Revenue Producing Properties under Construction
Area Balance value Appraiser's Value
Project area/ 30.6.98
Company Land (NIS'000) (NIS'000)
------- ---- ---------- ----------
Center-- industrial Ispro 8,000 13,317 18,152
South- industrial Ispro 5,200 12,379 23,102
- ---------------------------------------------------------------------------------------------------------
Sub-Total 13,200 25,696 41,254
- ---------------------------------------------------------------------------------------------------------
Vacant land available for Erecting Revenue Producing Properties
- ---------------------------------------------------------------------------------------------------------
South - industrial 7,186 34,837
- ---------------------------------------------------------------------------------------------------------
MEHADRIN LTD.
Details of Composition of Properties
(The balance value data are in NIS thousands of June 1998)
Balance Value Assessor's value
30.6.99 As at 15.10.98
Name of Site Rate of Holding Area In Dunam (NIS'000) NIS'000
------------ --------------- ------------- ---------- ----------
- --------------------------------------------------------------------------------------------------------
1. Packaging houses 34.96% 193.50 28,731 52,805
- --------------------------------------------------------------------------------------------------------
2. Revenue producing real estate
- --------------------------------------------------------------------------------------------------------
Center 79,202 97,873
- --------------------------------------------------------------------------------------------------------
Balance Value Assessor's value Assessor's value
30.6.98 As at 15.10.98 Per Dunam
(NIS'000) NIS'000 (NIS)
---------- -------- -----
3. Orchards
Ashkelon 2,796 48,954 17,509
Hadasim-Amalia Netanya 34.96% 1,110 89,548 80,674
Zita 34.96% 1,666 51,925 31,167
Pardesia 34.96% 1,909 97,982 51.326
Tsirifin 34.96% 2,476 91,675 37,025
Other--South 34.96% 1,185 19,618 16,556
Other--Center 34.96% 5,104 189,584 37,144
Other--North 34.96% 184 5,794 31,488
- ---------------------------------------------------------------------------------------------------------------------------
Total 16,430 72,547 595,081 36,219
K.B.E.
Details of Composition of Properties
(The apartment value data are in NIS thousands of June 1998)
1. Real Estate
Construction rights
--------------------------------- Appraiser's Value
Rate of Area Commercial Other As at 15.10.98
Holding in sq.m. Units Sq. m. Sq. m. (NIS'000)
- ------------------------------------------------------------------------------------------------------------------------------------
South 23.13% 2,595,989 35,814 50,735 218,793 475,978
- ------------------------------------------------------------------------------------------------------------------------------------
2. RENTED PROPERTIES
Appraiser's Value
Rate of Area As at 15.10.98
Holding in sq. m. (NIS '000)
- ------------------------------------------------------------------------------------------------------------------------------------
South--industrial & offices 23.13% 9,262 33,040
- ------------------------------------------------------------------------------------------------------------------------------------
3. TOTAL
Appraiser's Value Appraiser's Value
Rate of As at 30.6.98 As at 15.10.98
Holding (NIS'000) (NIS'000)
- ------------------------------------------------------------------------------------------------------------------------------------
23.13% 76,934 509,017
====================================================================================================================================
Adjustment between the Appraiser's Opinion and the Details included
in the Valuation of the Exchange Ratio
A. Property & Building
Revenue-producing
properties Real Estate
---------- -----------
Balance Economic Balance Economic
sheet value value sheet value value
----------- ----- ----------- -----
(the balance sheet value is in
NIS thousands of June 1998)
According to Appraiser's opinion 131,487 321,376 8,307 83,974
Breakdown in valuation of the exchange ratio:
Residential construction project in Petach Tikvah - gross
less advances from apartment purchasers
Residential construction project in Petach Tikvah -- net
According to the breakdown in the valuation of the exchange
ratio
Land in Tirat HaCarmel before the breakdown in the
valuation of the exchange ratio
-----------------------
131,487 321,376
-----------------------
Total real-estate,
inventory
Project for & project for
Inventory of Apartments residential construction residential construction
----------------------- ------------------------ ------------------------
Balance Economic Balance Economic Balance Economic
sheet value value sheet value value sheet value value
----------- ----- ----------- ----- ----------- -----
(the balance sheet value is in NIS thousands of June 1998)
According to Appraiser's opinion 4,919 6,782 16,719 34,140 29,945 124,896
Breakdown in valuation of the exchange ratio:
Residential construction project in Petach Tikvah - gross 29,259 112,429
less advances from apartment purchasers (18,349) (18,349)
---------------------
Residential construction project in Petach Tikvah -- net
According to the breakdown in the valuation of the exchange
ratio 10,910 94,080
Land in Tirat HaCarmel before the breakdown in the
valuation of the exchange ratio 686 12,468
B. Gav Yam
Land for the
Revenue-producing Revenue-producing construction of revenue-
properties properties in construction producing properties
---------- -------------------------- --------------------
(the balance sheet value is in NIS thousands of June 1998)
Balance sheet Economic Balance sheet Economic Balance Economic
value value value value sheet value value
----- ----- ----- ----- ----------- -----
According to Appraiser' opinion 461,251 811,342 84,274 185,550 210,383 120,351
Adjustments:
Neutralization of 25% of the
properties of an affiliated
company which were presented
in the Appraiser's opinion in the
framework of the Company's
properties (5,019) (22,736)
Classification between the items -- -- 155,438 120,351 (210,383) (120,351)
-------------------------------------------------------------------------------------
According to detail in the valuation
of the exchange ratio 456,332 788,607 239,712 308,901 --
=====================================================================================
Inventory of Project for
Real estate apartments residential construction
----------- ---------- ------------------------
(the balance sheet value is in NIS thousands of June 1998)
Balance sheet Economic Balance sheet Economic Balance Economic
value value value value sheet value value
----- ----- ----- ----- ----------- -----
According to Appraiser's opinion 62,317 191,600 19,153 22,515 144,220 191,619
Adjustments:
Neutralization of 25% of the
properties of an affiliated
company which were presented
in the Appraiser's opinion in the
framework of the Company's
properties
Classification between the items -- -- (19,153) (22,515) 19,152 22,515
---------------------------------------------------------------------------------
According to detail in the valuation
of the exchange ratio 62,317 191,600 -- -- 163,372 214,134
=================================================================================
C. Hadarim Properties
Revenue-producing Revenue-producing
properties properties in construction
---------- --------------------------
Balance Economic Balance Economic
sheet value value sheet value value
----------- ----- ----------- -----
(the balance sheet value is in NIS thousands of June 1998)
According to Appraiser's opinion 8,694 35,790 59,339 67,840
Adjustments:
Neutralization of 25% of the properties of an affiliated
company which were presented in the Appraiser's opinion
in the framework of the Company's properties (5,020) (22,736)
------------------------------------------------
According to detail in the valuation of the exchange ratio 3,674 13,055 59,339 67,840
================================================
Land for construction of
revenue producing properties
----------------------------
Balance sheet Economic
value value
----- -----
(the balance sheet value is in NIS thousands of June 1998)
According to Appraiser's opinion 12,042 91,675
Adjustments:
Neutralization of 25% of the properties of an affiliated
company which were presented in the Appraiser's opinion
in the framework of the Company's properties
------------------------
According to detail in the valuation of the exchange ratio 12,042 91,675
========================
D. Nave
Real Estate Residential construction
-------------------------- ------------------------
Balance Economic Balance sheet Economic
Sheet value value value value
----------- ----- ----- -----
According to Appraiser's opinion 212,345 255,553 87,434 135,079
Adjustments:
Advances from unit purchasers (54,915) (54,915)
----------------------------------------------------
According to detail in the valuation of
the exchange ratio 212,345 255,553 32,519 80,164
====================================================
E. Gad
Revenue-producing
Revenue-producing properties in
properties construction
--------------------- ----------------------
Balance Economic Balance Economic
sheet value value sheet value Value
----------- ----- ----------- -----
According to Appraiser's opinion 5,761 31,848 25,112 34,103
Adjustments:
Classification between items
Addition of costs of construction for land in
construction stages
Property evaluated according to balance sheet value
Adjustments for the purpose of consolidation -- -- -- --
Advances from unit purchasers
----------------------------------------------
According to detail in the valuation of the
Exchange ratio 5,761 31,848 25,112 34,103
==============================================
Residential Inventory of
Real Estate Construction apartments
----------- ------------ ----------
(the balance sheet value is in NIS thousands of June 1998)
Balance Economic Balance Economic Balance Economic
sheet value value sheet value value sheet value value
----------- ----- ----------- ----- ----------- -----
According to Appraiser's opinion 204,209 215,986 14,286 22,003 284 789
Adjustments:
Classification between items 284 789 (284) (789)
Addition of costs of construction for land in
construction stages 17,033
Property evaluated according to balance sheet value 345
Adjustments for the purpose of consolidation 6,350 -- -- -- -- --
Advances from unit purchasers (11,512) (11,512)
-------------------------------------------------------------------
According to detail in the valuation of the
Exchange ratio 210,559 233,364 3,058 11,280 -- --
===================================================================
F. Ispro
Revenue-producing Revenue-producing Vacant land for construction of
properties properties in construction revenue producing properties
--------------------- -------------------------- -------------------------------
Balance Economic Balance Economic Balance sheet Economic
sheet value value sheet value value value value
----------- ----- ----------- ----- ----- -----
(the balance sheet value is in NIS thousands of June 1998)
According Co Appraiser's opinion 93,917 166,665 25,696 41,254 7,186 34,837
Adjustments:
Original difference 9,958
Minority share in a property of a consolidated
company(74%) (656)
Classification between the items 7,186 34,837 (7,186) (34,837)
------------------------------------------------------------------------------
According to detail in the valuation of the
exchange ratio 103,219 166,665 32,882 76,091 -- --
==============================================================================
G. Mehadrin
Revenue-producing
Packaging houses properties Orchards
---------------- ---------- --------
Balance Economic Balance Economic Balance sheet Economic
sheet value value sheet value value value value
----------- ----- ----------- ----- ----- -----
(the balance sheet value is in NIS thousands of June 1998)
According to Appraiser's opinion 28,731 52,805 79,202 97,873 72,547 595,081
Adjustments:
- ------------
Equipment according to balance sheet value 7,334 7,334 26,298
---------------------------------------------------------------------------------
According to detail in the valuation of the
exchange ratio 36,065 60,139 105,500 124,171 72,547 595,081
=================================================================================
Itzhak Swary Ltd.
Financial Consulting
- --------------------------------------------------------------------------------
Messrs:
IDB Development Corporation Ltd., Discount Investment Corporation Ltd.
3 Daniel Frisch Street, 14 Bet Hashoeva Lane
Tel Aviv. Tel Aviv.
Dear Sirs:
Re: Valuation dated October 15, 1998 of the number of shares of Discount
Investment Corporation Ltd. ("Discount Investments") which will be
issued to IDB Development Corporation Ltd. ("IDB Development") in
consideration for 14,937,792 shares of $1 par value of PEC Economic
Corporation ("PEC")
On October 15, 1998 you were given an valuation of the said exchange ratio.
According to the provisions of the Private Placement Agreement between Discount
Investments and IDB, and after publishing the financial statements of Discount
Investments and PEC for the third quarter of 1998, we were requested by you to
check whether there were significant developments or changes regarding the net
asset value of Discount Investments and the net asset value of PEC which would
require a change in the said valuation, given on October 15, 1998.
As we stated in the valuation of the exchange ratio, in view of the similarity
in the investment portfolios of the two companies and in view of the holdings of
IDB Development of some 54.3% of the shares of Discount Investments prior to the
transaction, the exchange ratio has a low sensitivity to changes, within a
reasonable range, of values of the companies included in the investment
portfolios of Discount Investments and PEC.
In order to check this, we studied the drafts of the amended immediate reports
of IDB Development, we studied the financial statements of Discount Investments,
PEC and the principal companies included in their investment portfolios for the
third quarter of 1998, we checked publicly available data (including
developments in stock exchange prices of those companies in the Group traded)
and reviews published about the companies and about the branches in which they
operate, and we received additional data and clarification from the managements
of Discount Investments and PEC. Moreover we rechecked the indications in the
range of the value of Cellcom which was calculated in view of your detailed
instructions in the said valuation.
In view of the procedures we applied, the principles of which are detailed
above, and in view of the low sensitivity of the exchange ratio to changes in
the values of the companies, as mentioned, despite changes which took place in
the valuations of some of the companies included in the investment portfolios,
in our opinion there were no material developments or changes in the ratio of
the net value of the assets which should require a change in the said valuation.
We should emphasize that all the conditions and provisions detailed in the
valuation of the said exchange ratio are valid also with regard to this letter,
and therefore it should be read together with the valuation of the said exchange
ratio. Moreover, this letter is not a revaluation of the exchange ratio.
In addition, we were requested to calculate the number of share of Discount
Investments which should be issued to IDB in consideration for 3,484 shares of
Properties and Building Ltd., taking into account the net asset value of
Discount Investments and the value of Properties and Buildings as determined in
the said valuation of the exchange ratio. In our opinion, based on the
aforesaid, IDB should be issued 10,712 additional shares of Discount Investments
in consideration for 3,484 shares of Properties and Buildings.
We agree that this letter will be included and/or mentioned in the amended
immediate report which will be published regarding the exchange transaction.
Yours sincerely,
(-) (-)
Itzhak Swary Uri Cohen
------------ ---------
Date:
December 14, 1998.