Delek Automotive, which is controlled by Agmon, is preparing to do a public offering of its subsidiary (70%) Veridis at a value of NIS 4 billion – three times the value at which its controlling interest was acquired three years ago. Israel Infrastructure Fund and Harel Insurance are also expected to generate a huge capital gain from the offering.

Just three years after acquiring control of Veridis, Gil Agmon, the controlling owner and CEO of Delek Automotive, is about to make a partial realization of his investment at a huge profit. Veridis – owned by Delek Automotive (70%), Israel Infrastructure Fund (20%) and the insurance company Harel (10%) – is preparing to issue the shares of Veridis Holdings on the Tel Aviv stock exchange at a value of NIS 4 billion.

Delek Automotive acquired control of Veridis in March 2018 from Oaktree Capital for NIS 992 million – that is, at a company value of NIS 1.4 billion. Since then, it has drawn NIS 167 million in dividends from the company and NIS 246 million in shareholder loans and reduced the balance of the debt due to the acquisition of control of the company to NIS 579 million at the end of September 2020.

The second beneficiary of the public offering of Veridis is Israel Infrastructure Fund, which is expected to generate a huge capital gain. The fund, managed by Yaron Kestenbaum, acquired its holding in Veridis in July 2017 at a value of NIS 1 billion. The fund manages assets worth NIS 9 billion, and is owned by the Harel Group, Kestenbaum and Adv. Yehuda Raveh.

Delek Automotive – an importer of Mazda, Ford, BMW and Mini Minor – acquired control of Veridis at a time when the capital market was finding that some of the holding companies in the economy were suffering from a lack of focus and destroying value for their shareholders. At the time, Agmon estimated that it should reduce risk and diversify its fuel business, outside the traditional automotive world. This was a result of the sharp decline in the market share of automotive fuel in Israel to 7% in 2017 and the uncertainty involved in the automotive industry in the future, due to the increase in the market share of hybrid and electric vehicles, and the prospect of a gradual entry of autonomous vehicles.

The value creation expected for Delek Auto shareholders from the issuance of Veridis is even more impressive given the fact that the investment in Veridis was fully financed through bank and institutional credit. Veridis’ IPO underwriter will be IBI Underwriters.

Veridis is active in three areas: environment, water desalination and power plants. The company, which is listed in the balance sheet of Delek Automotive at a value of NIS 1.2 billion, has several relative advantages: its control over the entire value chain of the waste sector in Israel; the holding of a monopoly in the field of hazardous organic waste, and a de facto monopoly in the field of landfilling of organic waste; And its holdings in regional monopolies, such as the Evron landfill and the Efeh landfill, which also holds the largest landfill reserves in the country.

Veridis’ assets are manufacturers of strong and stable cash flows over decades through licenses and franchises. The fact that many of Veridis’ assets operate under a franchise with the state, local authorities and the country’s largest cement company makes it possible to capitalize the cash flows they generate at low interest rates – which reflects the low risk inherent in garbage collection, water desalination and electricity generation.

Veridis’ environmental area includes the collection, sorting, landfilling and treatment of domestic and industrial waste, as well as full-ownership in the Ecosol company, which holds a concession until June 2024 to operate the only incinerator of hazardous organic waste in Israel.

Veridis also indirectly owns RDF, which operates a 500,000-ton waste disposal facility per year at the Hiriya site and produces RDF (dry combustible material sold as a fuel substitute to Nesher, under an agreement until 2036). Environmental activities also include companies that provide waste collection for households, industrial waste and construction waste to municipalities and local authorities.

Veridis also owns 50% of the Evron landfill, 33% of the Ganei Hadas landfill, and 25% of the Efah landfill, which is the largest landfill in the country. The company also operates the Tovlan landfill in the Jordan Valley across the Green Line. The Tovlan site is the largest site in Israel producing compost from organic waste and its landfill.

Veridis generated a net profit of NIS 87 million on a turnover of NIS 827 million in 2019. Its environmental sector generated NIS 64 million in operating profit for it with a turnover of NIS 597 million in January-September 2020; Compared to an operating profit of NIS 55 million with a turnover of NIS 551 million in the corresponding period in 2019.

Desalination of water and energy

Another area in which Veridis is active is water desalination, through a 50% stake in the Ashkelon desalination plant, which desalinates 120 million cubic meters per year under a concession from the Israeli government until May 2027. The balance sheet value of this holding is NIS 198 million as of the end of September 2020. Veridis also fully owns Edom, which operates and maintains the desalination plant in Ashkelon.

The third area of ​​activity is the holding of 20% of the shares in OPC Rotem, which built and operates a power plant with a supply of 466 MW in Mishor Rotem, under a license until 2043. OPC Rotem is promoting a plan to build another power plant adjacent to the existing 650-800 MW plant. This plant may also serve as a storage facility for the photovoltaic facilities in the south of the country. The balance sheet value of this holding is NIS 439 million as of the end of September 2020.

The main risks

The main risks in Veridis’ operations are the possibility of price control in the field of waste, after a price committee that examined the prices and profitability of waste treatment services found indications of concentration in the field and exceptional profitability

Other risks include the apparent possibility of a sharp increase in the usage fee required by the Israel Land Authority from the landfills that Veridis holds, as well as the question of the price of allocating additional land for the expansion of the Efah landfill.

A more significant risk that may materialize is competition for Veridis’ landfills on the part of waste sorting, recycling and energy recovery facilities, as part of the Ministry of Environmental Protection’s main goal of reducing the landfill rate from 79% today to 26% by 2030. For example, the Shikun Binui-GES group intends to establish a plant for sorting, recycling, and energy production at the Shafdan facility, which will handle 400,000 tons of waste per year – 7% of the volume of household waste in Israel.

Another option to divert additional amounts of waste from landfill to recycling and energy recovery is to increase landfill fees, which are considered one of the lowest in the world.

The risks in the field of energy include, among other things, a decrease in the production tariff of electricity sold to OPC Rotem, as a result of the continued trend of a decrease in photovoltaic energy prices combined with storage capacity.

https://www.themarker.com/markets/.premium-1.9449111 (hebrew)