Tzachi Abu Plans Major Capital Raise to Revive G City Real Estate Group

Tzachi Abu, controlling shareholder of Ari Real Estate, is leading a strategic overhaul of G City, formerly Gazit Globe, aiming to revitalize the company through a significant capital raise and operational restructuring. Yesterday, Ari Real Estate, which Abu controls with a 51.3% stake, signed a deal to acquire 26% of G City shares from Norstar, controlled by Haim Katzman, for 661 million shekels. This values G City at nearly 2.6 billion shekels, a 32% premium over its market value of about 2 billion shekels. The payment will be split into 230 million shekels upon closing and 431 million shekels six months later. Ari Real Estate also secured an option to buy an additional 7% stake within nine months, potentially giving Abu full control.

As part of the deal, G City will raise about one billion shekels in new equity, with Norstar and Ari Real Estate committing 260 million and 280 million shekels respectively, while the rest will come from institutional investors. Abu emphasized that the capital raise was a non-negotiable condition for the deal, stating, "If you want a deal, we raise one billion shekels. Without that, there is no deal." He plans to use the funds, along with G City's cash reserves of approximately 1.4 billion shekels, to cover bond maturities over the next three years and reduce leverage below 50%.

Operationally, Abu intends to focus on developing G City's activities in Israel and Poland, while Katzman will oversee the divestment of assets in the US, Scandinavia, and Brazil. Abu highlighted challenges in Brazil, where despite strong mall traffic, the investment yield is unattractive compared to government bond yields. The restructuring also includes a dramatic cut in headquarters expenses, targeting a two-thirds reduction from an annual 290 million shekels, including a salary reduction for Katzman.

The deal marks the end of Katzman's 35-year leadership since the company's founding. Initially reluctant to partner with Abu, Katzman was persuaded by a major bank CEO's recommendation. Abu sees himself as a real estate operator rather than a financier and aims to restore investor confidence and stabilize the company. The phased transaction structure allows Katzman to test cooperation with Abu and avoids overburdening Ari Real Estate with G City's debt immediately.

The transaction may complicate plans to list G City's subsidiaries, such as Gazit Israel and the Polish unit, due to regulatory restrictions on corporate pyramids. However, Abu remains optimistic about future growth in Poland and potential mergers with Ari Real Estate. The deal is expected to shift control fully to Abu once he increases his stake beyond 35%, at which point he will become sole chairman and Katzman will assume the role of company president.