“The Bank Leumi tender discriminates against strategic investors. The chances that such an investor will buy the bank are therefore extremely small. We think that the tender as it is now should be revised. We believe that it will be disastrous if a strategic investor does not acquire control of the bank,” representatives of a group interested in the acquisition of Bank Leumi (TASE: LUMI) told acting Minister of Finance Ehud Olmert. Adv. Shlomo Ness and Meir Jacobson represent the group, which includes foreign private investors and institutions. Jacobson is chairman of Poalim Capital Markets - Investment Bank and former general manager of MI Holdings (State of Israel Properties).
Other parties who have formed, or are forming, groups for a strategic acquisition of Bank Leumi have made similar complaints.
Ness and Jacobson wrote to Olmert and MI Holdings chairman and Ministry of Finance Accountant General Dr. Yaron Zalika in the past few days. Zalika refused to meet with representatives of the group, saying that the tender had already been published, and that personal meetings were therefore not being held with bidders.
The group writes that long-term strategic investors are the preferred candidates for leading streamlining measures at Bank Leumi, but that the structure of the tender clearly favors short-term financial investors.
According to the group, since the tender structure sets the market price as a minimum for the deal, the question arises whether a strategic investor can afford to buy the proffered 9.99% bloc of Bank Leumi shares at higher than the market price. “Ostensibly, a strategic investor should pay a control premium on the market price for a controlling interest in Bank Leumi. In reality, however, a strategic investor is getting a crippled controlling interest, with severe restrictions that reduce the bank’s value by more than the control premium,” the group’s letter states.
The group refers to the obligation to hold the bank for at least five years and prove net shareholders’ equity of $1.5-1.8 billion, the ban on mortgaging shares in the controlling interest, severe limitations on withdrawing dividends and selling subsidiaries, and other restrictions.
”It is important to emphasize that short-term stock market investors will be willing to settle for smaller returns than strategic investors, who are locking up their money for five years. It is reasonable to assume that stock exchange investors will demand a 10% return, since they are completely liquid, while long-term strategic investors will demand a 15-20% return, since many restrictions apply to them that are not accepted practice outside the banking industry.
”If Israel wishes to attract investors with staying power, it must design a tender that will not detract from their chances of bidding,” the letter states.
Ness and Jacobson’s letter ends with a list of revisions that they assert are required “in order to give strategic investors a fair chance of competing with short-term money.” The main changes listed are as follows:
- Providing a discount for strategic investors on the strike price for the option of at least 30% of the share price for the first 9.99% bloc of shares sold (making the average price comparable to the price for the acquisition of Israel Discount Bank (TASE: DSCT)).
- Easing of restrictions on distribution of dividends and sale of subsidiaries, provided that the buyers maintain a minimum capital adequacy ratio of 11%.
The letter concludes by saying, “It is important to note that the proposed revisions do not harm short-term stock market investors, but equalize the conditions between them and a strategic investor, on whom the tender imposes severe restrictions.”
Published by Globes [online] - www.globes.co.il - on October 2, 2005