Everybody Wants A Piece Of KoorNeal Sandler
Benny Gaon, chief executive of Israeli conglomerate Koor Industries Ltd., is on a global selling mission these days. In early August, it was over lunch at a trendy Tel Aviv restaurant with Bjurn G. Larsson, president of Volvo's bus subsidiary. After several years of doing business together, Gaon talked up the idea of the Swedish company buying a 50% stake in Koor's bus-making company, Merkavim. He must have been convincing. Two weeks later, Koor and Volvo signed a preliminary agreement.
Making deals with global players is a key part of Gaon's strategy to turn the $3 billion Koor into Israel's first multinational. To do it, he's scrambling to line up such big-name partners as Volvo, Henkel, and Northern Telecom while also wooing the investment community. "Just a few years ago, Volvo wouldn't have dreamed of such a deal," says Gaon, largely because of the Arab boycott. But now his timing looks good: His bone-deep restructuring of Koor in the late '80s and early '90s is paying off in record profits just as the Middle East peace process is brightening prospects for foreign investment in Israel. Still, a big test is coming in November, when Gaon hits the road to line up buyers for a Koor offering of $150 million worth of American depositary receipts.
PROFIT CENTERS. Gaon, 60, is undaunted. A former head of a large supermarket chain, he was handed the CEO title at Koor in 1988, when the company was burdened with $1.4 billion in debt, a raft of money-losing businesses, and a bloated workforce. After massive write-offs, sales of businesses, and layoffs, Koor bounced back. The company is still diverse, with 36 subsidiaries with interests ranging from telecommunications and electronics to tourism and financial services. Gaon has set up each subsidiary as a profit center, with managers given lots of autonomy and stock options for good performance. In this year's first six months, Koor's profits spurted 16%, to $100 million.
Koor's rebound attracted the attention of Shamrock Holdings Inc., Roy E. Disney's Burbank (Calif.)-based investment company. Last March, in a major vote of confidence in Gaon and Koor, Shamrock paid $252 million--a 20% premium over market value--for a 22.5% stake in Koor. Those shares, purchased from the debt-plagued investment arm of Israel's trade unions, are now worth $300 million. That deal makes it a lot easier for Gaon to overcome foreign investor reluctance to invest in Israeli companies. As recently as last December, Koor abruptly cancelled a proposed issue of shares in Tadiran, an electronics subsidiary, because it considered the offering price too low.
Gaon has had better luck lately selling off chunks of Koor to form foreign partnerships. In January, Canada's Northern Telecom Ltd. took an option to purchase a 20% stake in Telrad Ltd., Koor's telecom subsidiary. The purchase price: $50 million. For years, Nortel licensed some of its technology to Telrad, fearing any direct links would jeopardize lucrative contracts in the Arab world. The peace process changed that. "We clearly feel that an equity investment would represent an important step forward in a market of increasing strategic significance to us," says Morrie Gurvetich, Nortel vice-president for international marketing.
In July, Germany's Henkel paid $10 million for a 50% stake in Koor's detergent operations. The Germans snatched the deal away from Colgate-Palmolive Co. The Volvo agreement came next. Koor shopped its bus company around, and Volvo grabbed the 50% stake for $10 million rather than let it go to a rival. Volvo's Larsson expects the deal to be completed by the end of September.
PEACE DIVIDEND. Gaon is looking to cut even more deals in the months to come. Up for grabs are stakes in its civilian and military communications divisions as well as its chemical operations. "We're talking with some of the biggest names in the business world," says Gaon.
Koor is not the only Israeli company up for sale. Unlike the past, the latest investments are not limited to Israel's red-hot high-tech sector. Volkswagen, Cable & Wireless, Unilever, and Nestle have all taken stakes in Israeli companies in recent months, now that peace is in the air. In the first six months of the year, foreign investment was a record $744 million.
The flurry of investment may help smooth the way for Gaon's planned ADR offering. If it's successful, Goan will use the proceeds to pay down Koor's debt and to invest in new ventures. More important, it will be a clear sign that Gaon has created a role for Koor on the world stage.