Tower Hits Three-Year Low on Bond Conversion: Israel Overnight

Tower Semiconductor Ltd. (TSEM), the Israeli maker of customized computer chips, slumped to a three- year low as investors in the company’s convertible bonds sell the stock before a price is set for the swap into equity.

The shares lost 2.1 percent in New York to $7.04 yesterday, bringing the Migdal Haemek, Israel-based semiconductor company’s decline in August to 28 percent, its worst monthly performance since 2008. The drop contributed to a 0.4 percent retreat in the Bloomberg Israel-US Equity Index (ISRA25BN) of the most traded Israeli companies in New York. Its Tel Aviv shares dropped 1.5 percent to 27.58 shekels, or $6.86, at the 4:30 p.m. close in Tel Aviv.

Tower is the worst performer on the Nasdaq Computer Index (IXK) in August after the company cut its sales forecast and on speculation moves by investors Bank Hapoalim Ltd. and Bank Leumi Le-Israel Ltd. will dilute the shares. Additionally, holders of convertible debentures are pushing the stock lower as the three- week period that will set the conversion price begins, according to Leader & Co. Investment House Ltd. and Oppenheimer & Co.

“Traders are starting to pressure the stock because it will benefit them when the conversion price is set,” Sabina Podval, an analyst at Leader & Co., said by phone from Tel Aviv. “Lowered revenue expectations and the dilution of the company’s shares by banks that hold its capital notes are the other two concerns.”

Israel’s TA-25 benchmark index dropped 0.7 percent to 1,108.23 in Tel Aviv today, trimming this year’s gain to 2.1 percent. The Israel-US Equity Index’s slide yesterday trimmed this year’s gain to 3.1 percent.

Debt Restructuring

Tower issued about $100 million of 7.8 percent convertible bonds in October 2010 as part of a debt restructuring, with the conversion price set at 1.2 times the shares’ average value in the 15 trading days before Sept. 18, 2012. Bondholders can change the debt into equity through December 2016.

“There is an interest to keep the stock lower because of the big window to convert,” Podval said.

Third-quarter sales will be between $152 million and $162 million, Tower said in an Aug. 9 statement that cited slower revenue growth at its largest customers. Analysts at the time were expecting revenue of $174 million, according to the average of three estimates compiled by Bloomberg.

Investors are also concerned about a glut of supply as Bank Hapoalim and Bank Leumi convert their capital notes into shares and may sell them in the market, according to Podval.

In 2006 and 2008, the banks restructured Tower debt they held into the notes. The banks received regulatory approval to convert about half their securities to shares, Tower Chief Executive Officer Russell Ellwanger said in an Aug. 9 call with investors.

Financial Troubles

“Tower had to increase debt and share count to overcome financial troubles, and those issues are coming to head now,” Andrew Uerkwitz, an analyst at Oppenheimer, said by phone from New York. “They have to work through some of these issues, but once they do, investors will wake up and see that the company is a strong performer.”

Israel, whose population of 7.8 million is similar in size to Switzerland’s, has about 60 companies traded on the Nasdaq stock market, the most of any country outside the U.S. after China. The nation is also home to more startup companies per capita than the U.S.

Cellcom gained the most since Aug. 15, advancing 5.3 percent to $7.11 in New York yesterday. Its Tel Aviv shares rose 1.3 percent to 28.21 shekels, or the equivalent of $7.02, today.

Israel Brokerage & Investments Ltd. raised its recommendation on shares of the Netanya, Israel-based telecommunications company to buy from neutral. Cash flow and improved operations are the main reasons for the upgrade, Ori Licht, an analyst at IBI, said by phone from Tel Aviv.

Mellanox Gains

Mellanox Technologies Ltd. (MLNX), the Israeli maker of technology used to transfer and store data, increased 2.2 percent to $116.80. Its shares in Tel Aviv advanced 1.8 percent to 472 shekels, or $117.38.

The company will be added to the MSCI Standard Index and removed from the MSCI Small Cap Index at the end of the month, a move that may result in net inflows of $120 million, according to a report from Clal Finance dated yesterday.

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net

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