Kenon set to dispose of more ZIM shares

The share price of Israeli shipping line ZIM Integrated Shipping Services (NYSE: ZIM) has risen by 260% in the past year, allowing holding company Kenon Holdings (TASE: KEN; NYSE: KEN) to continue to reduce its stake in the company. At the end of last week, Kenon, the largest shareholder in ZIM, announced its intention of selling or doing deals with its remaining holding. This means the possible sale of shares worth nearly $500 million. Kenon holds 16.5% of ZIM, a stake currently worth $472 million. In response to the announcement, Kenon’s share price jumped 5% at this morning’s opening on the Tel Aviv Stock Exchange.

Six months ago, Kenon sold ZIM shares for $111 million, and at the same time signed an option for the sale of additional ZIM shares (4.2% of the company). That option (“the Collar”) is now cancelled, and in its place a capped call deal has been signed whereby the shares will be sold to the same bank with which the option deal was signed. “The capped call transaction will allow Kenon to retain exposure to potential upside in ZIM’s shares above the call price, up to the cap, and will be cash settled. As a result of the termination of the Collar, the 5 million shares that were subject to the Collar, and which had been pledged to the bank with which Kenon entered into the Collar, will be sold to the bank and Kenon will receive cash proceeds from the ZIM shares, minus the cost of the cash settled capped call transaction, of approximately $93 million,” Kenon stated.

It was also reported that Kenon will make further disposals of ZIM shares through JP Morgan and Citigroup.

As mentioned, Kenon Holdings is still the largest shareholder in ZIM, but at the time of ZIM’s flotation on the New York Stock Exchange in 2021 it held 30% of the company, almost double its present holding.

A volatile market

ZIM was floated a few years after two large debt settlements. In 2009, it rescheduled debt of $7 billion, and in 2014 it carried out a 50% “haircut” on debt of NIS 34 billion. The flotation was at a pre-money valuation of $1.5 billion, and after a period in which the share price declined, it rose again thanks to a rise in shipping prices. ZIM’s market cap reached a peak of some $10 billion in 2022.

As shipping prices fell again, so did ZIM’s share price, but it has shot up again in the past year, partly because of the threat to shipping in the Red Sea from the Houthi rebels in Yemen, which has meant longer shipping routes and consequently a smaller supply of available vessels, allowing ZIM to raise prices again. ZIM’s current market cap is $2.86 billion.

According to “The Wall Street Journal” data, most analysts have neutral or negative rating for ZIM, and the average price target is lower than the current market price. Asked at the time of the release of the latest financials what the analysts don’t understand about ZIM, company CEO Eli Glickman responded, “I’m careful about what I say about analysts, but they are generally expert at explaining what has happened in the past, and it’s difficult for them to foresee the future. They work in accordance with formulae, and they’re cautious. The shipping market is very volatile, and they don’t want to disappoint investors, so they’re very cautious.”

Last week, ZIM released strong financials, and raised its guidance for 2024 for the third time this year. For the third quarter, the company recorded revenue of $2.77 billion, representing growth of 117%, and posted a net profit of over $1.1 billion, which compares with a loss in the corresponding quarter. ZIM expects adjusted EBITDA for the year of $3.3-3.6 billion.

The company declared a dividend of $440 million ($3.65 per share), comprising a regular dividend in accordance with the company’s dividend policy, and a special dividend of $100 million.

According to the latest SEC filings, besides Kenin there is one other party at interest in ZIM, namely Jane Street, which is registered in Delaware, and holds 5.3% of the company. Most of the investors in ZIM, however, are retail investors. Commenting on this last week, Glickman said, “Most of the investors in ZIM are short term. That has advantages and disadvantages. The advantage is that the share is very liquid; there are days when the volume of trading in ZIM is higher than in all the other shares on the Tel Aviv Stock Exchange put together. That indicates the extent of interest in the stock. The disadvantage is that the share price can also fall, and it’s very hard to predict that.”

Kenon itself was spun-off from The Israel Corporation (TASE: ILCO) in 2015 as an independent public company. The Israel Corporation remained with the longstanding holdings in ICL and Bazan, while Kenon received the investments in Tower Semiconductor (TASE: TSEM; Nasdaq: TSEM), Chinese car maker Qoros (founded as a joint venture between Chery and Israel Corporation in 2007 and since shut down), the power production business, and the stake in ZIM.

In the years following the split, Kenon distributed its Tower Semiconductor shares as a dividend, sold part of its overseas activity, and floated OPC Energy, the power producer, on the Tel Aviv Stock Exchange. OPC has become Kenon’s core activity. It has a current market cap of NIS 7.2 billion, and Kenon owns 54.5% of it. Kenon’s own current market cap is NIS 5.5 billion, after a 37% rise in its share price so far this year. Idan Ofer’s stake in Kenon (through Ansonia Holdings) is worth NIS 3.36 billion.

Published by Globes, Israel business news – en.globes.co.il – on November 24, 2024.

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