Elron's Atlantium Holding Shows Great Promise

| About: Elron Electronic (ELRN)

I have written several times about the uniqueness of Elron Electronic Industries (ELRN) as Israel’s technology ETF. Last week I paid a visit to another of its portfolio companies, Atlantium Ltd., Elron’s first go at the water treatment sector.

Atlantium is interesting not just because of its ingenious technology but also because this is a niche that is only beginning to develop, has endless potential for expansion, and provides Atlantium with a unique position. It’s a situation much like that of Given Imaging (GIVN).

At this point in Atlantium’s development, the difference between a company that will merely succeed and one that will become a global leader lies in its management. It has proved itself in all the other key variables and is now waiting for business success. Atlantium describes itself as a company that develops and provides innovative water disinfection solutions. Its Hyrdo-Optic Disinfection [HOD] technology is a combination of laser and optical systems. The company was founded three years ago, and has raised $30 million to date. It employs an outstanding interdisciplinary team of 50 people. Atlantium has already achieved recognition, and its technology is patented. It is headquartered in Beit Shemesh, with two other centers in San Diego and Shanghai.

The current state of the water treatment industry is not encouraging. Regulations governing water use in developed countries are becoming increasingly stringent, while demand for clean water continues to rise. Water infrastructures in the West, not to mention the less developed parts of the world, are old and dilapidated. In terms of annual investment, the world spends $400 billion on water, of which $230-260 billion is invested in infrastructure and upgrading, $80-100 billion is spent on technology development and implementation, and $35-40 billion is invested in products for the water industry. Atlantium fits into all three categories, although it belongs primarily to the upgrading and technology segment.

What does the company actually do? There are several technologies for water disinfection, from chlorination (treating water with chlorine, in swimming pools, for example), treatment with special chemicals, ozonization (treatment with bromides), purification filters, heat pasteurization, and ultraviolet rays. Atlantium’s HOD technology provides unbeatable results -- almost 100% disinfection. But, as several veterans who have been successful with this technology tell me, “success in a technological development is only half of the equation. The other half is selling.”

Having been involved in the medical device industry, for example, I have, on more than one occasion, seen medical products whose technologies were 100 times superior to those of their rivals but still didn’t sell. Why? Because the name of the game is marketing. As long as the old technologies deliver the goods, no new technology will replace them unless you offer buyers a significant upgrade at low cost. This is where Atlantium has an advantage.

According to the company, its products are used primarily in dairy plants such as those of Tnuva Food Industries Ltd. or Strauss-Elite Ltd., fish pools, beverage factories, and so on.

The company removes three or four meters from the pipe that pumps water into the system and replaces them with the new system. This consists of a chamber containing a length of metal-coated fiber optic cable. Fixed on each side of the device are out-of-the-water UV lamps and sensors. The light from both lamps is trapped inside the device, reflecting the rays back into the water and purifying it of all bacteria and germs.

Atlantium will have more work than it can handle in the industries I’ve mentioned, so the potential here is endless. Add to that that payback on the investment is delivered within one year, and you have an offer that can’t be refused. But as I always say, management is the key to success. That is where everything begins and ends, for better or worse.

I’ll start from the top. Atlantium’s controlling shareholder is Aurum Ventures MKI, the investment company of Morris Kahn (one of the founders of Amdocs (NYSE:DOX) in Israel. The company’s chairman is Kahn’s son Benjamin. The Kahn family owns most of Atlantium, while Elron, which holds 32% of its issued capital, invested $10 million in Atlantium in a recent private placement for the company, which raised a total of $17 million. The remaining $7 million represented the conversion of loans given to the company during 2006.

Atlantium’s CEO, Ilan Wilf, has more than 16 years of management experience gained in the U.S,, where he specialized in water and waste water treatment. He has gathered a highly talented team ranging from specialist academics to laser experts from Lumenis LUME.PK). Wilf understands the field and has a good grasp of marketing in addition to rich experience, so I am less concerned about the functioning of the company’s management.

Altantium is just one of the fantastic companies that Elron has invested in. Elron has been exiting heavy, older investments, starting with Elbit Systems (NASDAQ:ESLT) and then Partner Communications (NASDAQ:PTNR), and is using the proceeds to distribute dividends and invest in companies with proven, cutting-edge technologies. It nurtures all the companies it invests in patiently and tolerantly.

Elron is a long-term investment that is likely to produce sizeable returns. As there are very few investment companies of this type around that can show the track record that Elron has, I firmly believe in the company, especially seeing that it has a market cap of $375 million, a ridiculous figure considering that it has more $120 million in cash.

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Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007. Republished on Seeking Alpha with full permission.