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Eleven Firms Pass Over ECI

According to company filings, ECI Telecom Ltd. was shopped extensively for 18 months before reaching a buyout agreement with Shaul Shani's Swarth Investments LLC.

In a 6-K document filed with the Securities and Exchange Commission (SEC) , ECI provides a number of details pertaining to the background of the deal, including the revelation that it had spoken to nearly a dozen potential buyers before Swarth made it a buyout offer.

According to the filing, ECI's search for a buyer began in September 2005 after the company received an unsolicited offer from a potential strategic buyer. As a result, the company hired Goldman Sachs & Co. to review that bid and to identify other potential purchasers, both public and private.

From September 2005 until February 2007, ECI says Goldman introduced it to 11 potential buyers in the telecom and private equity markets. While each buyer expressed initial interest in the company, none of the meetings resulted in a formal buyout proposal.

Enter Shaul Shani, who met with ECI chairman Shlomo Dovrat in late February to discuss the purchase of a portion of ECI shares held by major shareholders. Shani and Dovrat held several additional talks in April, when Shani offered between $9.00 and $9.25 per share for a stake in the company. But, according to the filing, Dovrat made clear that $10 per share would be the minimum offer accepted by shareholders.

In May, Shani indicated a desire to buy out ECI completely for $10 a share and met with ECI director and Clal Industries and Investments Ltd. CEO Avi Fischer, who negotiated on behalf of ECI's controlling shareholders.

A series of meetings were set up for due diligence, and in June Swarth had secured an agreement from Credit Suisse for debt financing related to the transaction. After a month of further negotiations -- and news of a possible transaction being leaked to the Israeli press -- ECI and Swarth signed a definitive merger agreement on July 1.

A sweetheart deal?
Given the lack of interest in the first round of being shopped, it should come as no surprise that ECI might not receive an alternate bid during its 30-day go-shop period. However, some analysts believe Swarth received a "sweetheart deal" for the company, based on IDB Group 's interest in cashing out and relationships Shani has with some of ECI's directors.

It is worth noting that two of ECI's directors -- Avi Fischer and Raanan Cohen -- also serve on the board of Brazilian telecom firm GVT , where Shani is also a director.

Fischer serves as executive VP of IDB, deputy chairman of IDB Development Corp., and joint-CEO of Clal, which is a subsidiary of IDB. Cohen, meanwhile, is CEO of Koor Industries Ltd. , another IDB property. IDB, through Koor, Clal, and other entities, holds a 41 percent stake in ECI.

While ECI maintains these relationships are not considered "personal interests" in the merger, Fischer and Cohen did not participate in the merger's approval process.

ECI downgraded
With the company's go-shop period over, analysts have downgraded the company's shares due to limited upside in terms of price and possible risk associated with financing of the Swarth deal.

Yesterday, analysts at Citigroup and Jefferies & Company Inc. downgraded the stock from Buy to Hold and lowered their price targets to $10 to match the value of Swarth's bid.

In his research note accompanying the downgrade, Citigroup analyst Mike Genovese wrote, "We expect the acquisition by Swarth Investments to close at $10, although we believe the price is a significant discount to peers."

But some analysts still believe there is a slight risk involved in the transaction. In his research note, Jefferies analyst George Notter pointed to a lack of detail around Swarth's debt financing plan for the transaction. "Given macro concerns on the debt/LBO environment," he writes, "it's possible there may be some risk to Swarth's anticipated debt financing plan for acquiring ECI."

— Ryan Lawler, Reporter, Light Reading

digits 12/5/2012 | 3:04:31 PM
re: Eleven Firms Pass Over ECI However this turns out it's going to be a process worth watching.

If Swarth doesn't manage to pull together the package it needs, it'll be interesting to watch ECI management's reaction, the company's share price movement, and the impact that an on/off takeover might have on its business continuity.

If the takeover DOES go through, then what happens? Will ECI remain as a single business and possibly even grow through M&A, or is it being acquired because its parts are worth more than the price being paid?

ECI may not have many DSLAM customers, but it has FT and DT, and its optical business holds its own in those increasingly-important emerging markets. Those assets may be of interest to others. Maybe.

Ray
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