Azrieli to Sell (NIS 400 Million) Desalination Facility at Palmahim to IIF

April 24, 2014 | The Marker

Completion of the sale will return a profit of NIS 100 million to the Azrieli Group. The facility is one of Granite Hacarmel’s assets and its sale is a result of the decision to sell or dissolve the company. This is Azrieli’s first significant realization of assets in its 20 years of activity in Israel.

Last week, the Azrieli Group, owned by David Azrieli, took a significant step towards the first realization of one of the assets owned by its company – Granite Hacarmel. Azrieli signed a memorandum of understanding with Israel Infrastructure Fund (IIF), managed by Yaron Kestenbaum, for the sale of the Via Maris Desalination Plant (100%) located on the coast at Palmahim.

The parties agreed that IIF will pay NIS 400 million for the company which owns the concession for the plant and for Derech Hayam Ltd., which built and operates the plant. The price of the sale was set on the basis of capitalization of double digit returns – estimated at 15% – on the plant’s operating profit over the life of the project. According to estimates, the plant generates an operating profit of approximately NIS 40 million annually.

The desalination plant was built with an investment of NIS 1 billion, and after two extensions, its annual output is 90 million cubic meters. The first stage was built in accordance with an agreement between Derech Hayam, wholly owned by Granite, and the Government. The agreement stipulated that Derech Hayam would build the plant, designed to desalinate 30 million cubic meters of water per year, using the BOO (Build, Own, Operate) method, in which it would build the plant and at the end of the 25 year operating period – in 2029 – it would take full ownership.

Derech Hayam expanded the plant by 15 million cubic meters, according to a supply agreement signed with the Government in 2009, for a period of 18 years. In October 2011, an agreement was signed to double the plant’s output to up to 90 million cubic meters, whereby the additional 45 million cubic meters would be supplied by April 2029. The project was funded by loans from Bank Hapoalim (80%) and equity guaranteed by Granite.

For the past several months, IIF has conducted negotiations with Azrieli executives including the Group’s Active Deputy Chairman and Chairman of Granite, Menahem Einan; Azrieli CEO Yuval Brounstein and Granite’s outgoing CEO, Yossi Singer. This is part of Azrieli’s decision to either sell Granite Hacarmel, or alternatively, to dissolve the company and realize its assets: Sonol, Tambor (Azrieli is negotiating its sale to the Apax Fund), and in the future Supergas and GES (the wastewater and water company, through which Granite owns the Palmahim Desalination Plant).

The transaction amount includes mechanisms to make adjustments for any changes in the sector as needed. For example, the Finance Ministry and the Desalination Administration recently announced that they would only purchase 345 million cubic meters in 2014, virtually unchanged as compared to 2013, and that the additional 150 million cubic meters per year of desalinated water from the Soreq Desalination Plant (that began operation in August 2013), would be completely offset by the 40% reduction in the purchase of water from the plants in Hadera, Ashkelon and Palmahim.

IIF was established in 2007 and is owned by the Harel Insurance and Finance Group, Adv. Yehuda Raveh and Yaron Kestenbaum. It manages two funds with investments in Israel and overseas, totaling more than $1 Billion, in wide ranging sectors, such as energy (Dalia Power Energies), transportation (Highways 6 and 431 and the Jerusalem Light Rail), logistics and telecommunications infrastructure. Among the fund’s prominent investors are leading financial institutions such as Leumi Partners, Harel and Amitim.

The purchase of the Palmahim Plant is IIF’s first investment in the field of desalination. As in similar investments, IIF may bring in additional fund partners. It is thought that institutional investors will also join, as this is a financial asset bearing a significantly higher yield than current market interest rates.