Ups and Downs of the Ben-Dov-Saban Deal

Dec 07, 2012

Scailex will show a loss of up to NIS 1.6 billion

Scailex, which owns 44.5 percent in Partner Communications, will sell 30.7 percent along with control of the company to Haim Saban under the agreement concluded just prior to publication of its third-quarter results. But although the deal reflects a drop of hundreds of millions of shekels in the goodwill carrying value of Partner, no loss provision was recognized in the report.

The deal is estimated to reflect, from Saban’s perspective, a NIS 27 to NIS 30 share value for Partner, which is valued on the books of Scailex – controled by Ilan Ben-Dov – at NIS 34 per share. The non-adjustment for a loss arising from a known drop in value is quite unusual.

As a rule, calculating the drop in value requires determining the recoverable amount – defined as the greater between fair value, which represents the selling price, and the value-in-use, representing the net present value of cash flows arising from continuous use.

Since the stock is traded, the fair value is based on the share price, while the value-in-use is determined according to the NPV of future cash flows by use of an appraisal. As a result, a reduction in value is often avoided by using an appraisal that sets value-in-use above the share price.

In Scailex’s special case its quarterly report continues justifying the goodwill through value-in-use calculated the standard way by discounting Partner’s operational cash flows, based on an appraisal supporting a price of NIS 34 per share and taking into consideration the Saban deal or the outlook for a quick exit.

Had Scailex already classified Partner as being up for sale at the end of September in accordance with IFRS, it would have needed to recognize the impairment based on trading value in the third-quarter report. Both the NIS 21 share price at the end of September and its NIS 25 price when the deal was signed are much lower than either their book value or the price reflected by the Saban sale.

It should be recalled that Scailex put Partner on the block at the end of the second quarter. The company even anticipated, in its cash flow forecast at the time, the quick sale of most of its Partner stock by the first half of 2014 at the reduced price of NIS 27 per share. But designating an asset as being held for sale is only done when the sale is highly likely to occur within a year of the balance sheet date. Neither did Scailex make this distinction at the end of September, but it probably won’t be able to avoid doing so at year’s end.

At the end of the third quarter, just as at the end of the second quarter, Partner was in a “twilight zone” – apparently not meeting the stringent rules for being classed as an asset held for sale while, at the same time, the sale of the main part of the holding within the foreseeable future to meet its liabilities was clearly anticipated. Meanwhile, by any logic the value-in-use method representing cash flows produced by the extended holding of the stock has no relevance.

Putting aside the question of whether Scailex’s value-in-use at the end of the second and third quarters needed to take into account the assumption of a quick sale, as anticipated in the cash flow forecast, it is hard to overlook that the value-in-use method represents a shortcut around the fair value approach based on market value. Assuming fair value doesn’t include a control premium, this shortcut saved Scailex from recognizing an impairment loss of about NIS 2 billion at the end of the third quarter, NIS 900 million of which belongs to shareholders.

Scailex is expected to continue holding 15.7% of Partner, an investment that will likely be treated under the equity method considering the voting arrangements made with Saban. But bearing in mind the concept of notional sale, it will in all likelihood need to classify all its Partner stock as being held for sale.

The upshot is that even though the deal isn’t expected to be completed before the end of next March, Scailex will need to recognize approximately NIS 1.6 billion in losses on its 2012 statements, including NIS 700 million attributed to shareholders, based on Partner’s current NIS 25 share price. The exact loss ultimately depends on its stock price at the end of the year.