How Jacob Luxenburg achieved over 1,000% return

Debt arrangements in the past in some of the largest holding companies in Israel are mainly identified with the losses caused to investors. People and institutions that held bonds of those leveraged companies had to take haircuts totaling billions of shekels when the tycoons who controlled them failed to service their debts.

There are, however, those who profited, big time. The defaults gave rise to tycoons of a different kind. One of the most prominent is Jacob Luxenburg (Luxy). Lapidoth Capital (TASE: LAPD), which he controls, reached a peak market cap last week of NIS 3.3 billion (about $1 billion), implying a value for Luxy’s 77% holding of NIS 2.6 billion.

Anyone who believed in Luxy’s business and bought shares in Lapidoth Capital ten years ago has seen a dream 1,380% return on the investment. A large part of the rise came after Lapidoth Capital took over the assets of Africa Israel in the debt arrangement that was completed in early 2020. Since then, Lapidoth Capital’s share price has shot up 250%.

Following a decade-long campaign of mergers and acquisitions, Lapidoth Capital now has several main arms. Through privately-held Africa Israel Investments, it controls public company Danya Cebus (construction contractor) and Africa Israel Residences (housing developer throughout Israel). It is in international trade through Alpros, which it has attempted to float in the past; in oil exploration through the Lapidoth Heletz partnership; in the importing of Samsung mobile telephones through Sunny Mobile Communications; and it has its traditional activity of energy and water drilling equipment.

Luxenburg, 66, started out in the capital market in the 1980s as a portfolio manager at investment house Batucha, and later left to found his own investment company. As one of the oldest and most sophisticated players in the local capital market, he has been able down the years to spot investment opportunities that enabled him to build from scratch an empire worth billions, mostly deriving from the businesses he bought in the debt arrangements for the assets of Lev Leviev (Africa Israel) and Ilan Ben-Dov (Sunny Mobile Communications-Scailex).

Another portion of the investments in which he is involved was acquired through a control battle. It started with Lapidoth Oil Exploration (now Lapidoth Capital), which was formerly controlled by the late Bruce (Baruch) Rappaport. “At the end of the 1990s,” Luxy related in an interview with “Globes”, “it was a company with mediocre management or worse, and that was also a low period on the capital market, so various things came together that led to the share price being far below what the company was worth, and that attracted us.”

RELATED ARTICLES

Construction co Danya Cebus completes TASE IPO

Warring ADO shareholders sign joint management agreement

Lapidoth Capital to buy Africa Israel

After Luxy reached a significant stake in the company, he challenged Rappaport’s control, arguing that Lapidoth was not managed well, and that the more work it received, the more money it lost. “We started to fight over it for two years, and in the end we made a BMBY (buy me buy you) agreement,” he said. “I was sure that he would buy the company, and to my surprise he said to me, ‘Young man, take it, run the company the way you want.’”

As time went by, Lapidoth’s non-financial activity grew at the expense of its investment portfolio management. Nevertheless, even now Luxy does not forego short-term moves on the stock market when they can yield large profits. An example is the purchase of shares in income-producing real estate company ADO Group, which is active in Berlin, in 2018, when a bitter control battle was taking place in the company, and the subsequent sale of the shares, yielding a quick profit of some NIS 50 million.

Moving up a league through debt settlements

The two quantum leaps that turned Lapidoth into the company that reported revenue of NIS 3.3 billion and a net profit of NIS 120 million for the first half year last week came through debt arrangements. In 2014, Luxy led a takeover of Samsung franchisee Sunny Mobile Communications-Scailex, which was previously held by Ilan Ben-Dov, who was undone by the burden of debt he had taken on.

The more dramatic move in business terms was completed in 2020, when Lapidoth (together with Altshuler Shaham) bought what was left of the Africa Israel Investments group, which had been one of the largest investment companies in Israel. The dramatic unlocking of value in the wake of that acquisition was swift and steep. Danya Cebus, for example, which was priced in the debt arrangement at under NIS 500 million, was floated a year later and now has a market cap of NIS 2.7 billion.

“It’s not that we hate debt”

Arik Speier CPA, formerly with accounting firm KPMG Somekh Chaikin, joined Luxy in early 2020, and has been helping him in his recent value-unlocking moves. Speier serves as deputy chairperson of Lapidoth Capital. One of the main processes that he and Luxenburg have instituted at the companies they have taken over is gradually to reduce debt. Lapidoth Capital itself has a single bond series amounting to NIS 160 million.

“It’s not that we hate debt, sometimes it’s a positive thing, but in recent years we saw where things were going, so we did the opposite to everyone else,” Speier told “Globes”. “We took care to boost cash. We made offerings in equity, and not debt. We believe that today the money will be worth much more in non-financial deals.”

Your main holdings are in real estate, a sector that is sensitive to interest rate rises. Does that not put you at risk?

“Danya Cebus is first of all a contracting company. It’s true that it builds residential projects, but it is also active in infrastructure, specifically in transport, such as building the fast lane and the blue line of the light rail. So Danya is more of an industrial contracting company.

“In Africa Israel Residences, the deals are combination deals. We haven’t bought plots for cash. That way we were able to reduce the company’s debt. The consequence of rising interest rates is that everyone will pay more. The prices of the apartments themselves will rise. Strong developers that have not leveraged themselves will be able to buy land at more sensible prices.”

Do you feel a change in real estate?

“We are already starting to receive proposals that are doing the rounds in the market to buy land with building permits. Until six months ago that was inconceivable. There were no offers like that on the shelf. And I’m talking about well-known names that are starting to offer land. The reason is that they know we have money. But I believe that even at the prices in these offers the change hasn’t yet been absorbed. The real estate market reacts slowly.”

Is there a decline in the number of apartments sold?

“Most of the apartments, 95%, that we were supposed to hand over by 2024 have already been sold. It’s true that it’s taking longer to sell luxury apartments costing NIS 10 million and upwards. But here too, it’s not that there are no sales. And with apartments in Kiryat Bialik, Givat Shmuel, and other places, when the price ranges between NIS 2 million and NIS 2.5 million, there are purchases.”

What about bringing in a partner?

“We’re examining that. But in our case, the owner doesn’t sell shares, we only buy our own shares. We are punctilious about distributing dividends at all the companies we hold.”

Published by Globes, Israel business news – en.globes.co.il – on August 28, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.