Phoenix exercises option on El Al frequent flyer club stake

The Covid-19 restrictions have been almost completely removed, Israelis have gone back en masse to flying, and the business and financial position of El Al Israel Airlines (TASE: ELAL) is steadily improving. Two reports by the company within the past few days are evidence of this trend, following strong passenger booking numbers that it released last month.

Against this background, El Al’s share price rose yesterday, contrary to the market trend, to a level giving the company a market cap of NIS 680 million ($200 million), in part thanks to the sharp weakening of the shekel against the US dollar. So far this year, El Al’s share price has risen 90%.

On Tuesday, El Al reported that insurance group The Phoenix Holdings had decided to exercise its option to buy 19.9% of the shares in El Al subsidiary El Al Matmid Frequent Flyer Club for $14 million. The deal values El Al Matmid at $70 million (NIS 240 million).

The exercise of the option was under an agreement to buy up to 25% of El Al Matmid, part of an financing agreement signed by the three companies earlier this year whereby The Phoenix Holdings lent El Al Matmid $130 million at 6% annual interest for six years, repayable in quarterly instalments.

As a result of the exercise of the option, El Al will post a $63 million gain in shareholders’ equity in its third quarter financials, and will retain 80.1% of El Al Matmid.

El Al Matmid Frequent Flyer Club has about two million members, of whom over 300,000 hold a FlyCard credit card. Its contribution to El Al’s revenue is estimated to be in the tens of millions of dollars annually.

It was reported in the past that El Al Matmid had been valued at $500 million, before the deal with The Phoenix Holdings, but in the loan and option deal The Phoenix Holdings received a substantial discount, the valuation for the purposes of the deal being $387 million. From El Al’s point of view, it added $215 million to its shareholders equity and $130 million cash. El Al sees The Phoenix Holdings as a strategic partner that will help it to launch new initiatives in insurance, tourism, and a digital wallet through El Al Matmid. In the view of El Al’s management, the frequent flyer club is only in its infancy, and the planned new initiatives reflect its potential.

Haggai Schreiber, chief investment officer at The Phoenix Holdings, said, “In the past few months we have monitored the performance of El Al Matmid closely, and it exceeds our expectations, so we have come to an understanding on the early exercise of part of our option.”

El Al CFO Itzik Eliav said, “The exercise of The Phoenix’s option on l Al Matmid represents another important milestone in El Al’s financial strength and the business development potential of the club as a lever of growth and profitability. The exercise of the option will enable El Al to abide by the agreement with the state on an alternative to an equity offering.”

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El Al explained that the growth in its capital makes it unnecessary for it to raise more money. In an agreement signed with the state earlier this week, it was agreed that the company’s capital can be strengthened in alternative ways. Two days previously, the company and its controlling shareholder (Kenny Rozenberg’s Kanfei Nesharim) signed a new agreement with the State of Israel, amending previous state aid agreements signed during the Covid-19 pandemic period. Under the new agreement, El Al will repay a debt of $45 million to the state (against which El Al issued to the state bonds convertible to El Al shares) by December 20, 2022, and a $62 million equity offering will be deferred to April 1, 2023. In the meanwhile El Al will be entitled to strengthen its capital structure in other ways, such as through the sale of a stake in its frequent flyer club which took place two days later.

Dina Ben-Tal Ganancia became CEO of El Al in early June, and since then she has managed to sign new labor agreements with the pilots’ committee and the maintenance and engineering workers committee. The also signed an agreement with the administrative workers’ committee anchoring a series of understanding’s with them until the end of 2022, and she is seeking to reach understandings with the air stewards as well.

These agreements will contribute to continued consolidation of the company and streamlining of its workforce. Together with the new agreement with the pilots signed last month, the agreements are aimed at expanding the company’s productive capacity and improving its profitability.

In fact, El Al is the second airline in the world to have signed an agreement with its pilots in the aftermath of the Covid-19 pandemic. In the aviation industry as a whole, as at El Al itself, the main constraint on output today is a shortage of pilots after the two difficult years of the pandemic.

Published by Globes, Israel business news – en.globes.co.il – on September 15, 2022.

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