Experts: Ultimate owners of Leumi unclear

Banking sources: US investor disclosure regulations will cause Cerberus-Gabriel problems.

Ministry of Finance officials have declared a great victory in the Bank Leumi (TASE: LUMI) tender, but banking specialists are not so enthusiastic. They say that the victory wasnt so great: the buyers (Cerberus Capital Management LP and Gabriel Capital Management) are too anonymous, their business isnt transparent enough, and, most of all, the saga is far from over. Is this the Ministry of Finances great triumph?, they ask.

These experts say that this great success should be seen in perspective. The winning consortium has synergetic advantages, and can contribute to Bank Leumis international expansion, but it also has quite a few drawbacks, headed by its problem in the US.

According to these experts, the price is right, but not as good as it sounds. The 16% premium on the market price only applies to the 10% being bought now. The strike price for the 10% option will be below the market price. The new controlling shareholders will probably buy additional shares on the market, at the market price. The overall price will be only 2-4% higher than the market price.

The main question raised by these experts, however, concerns the identity of the group, and its standing in the US. As soon as it won the tender, it became clear that the group would have a problem obtaining approval for the acquisition of Bank Leumi USA, which accounts for 15% of Bank Leumis activity. The consortium does not meet regulatory requirements, which, among other things, call for disclosures about its business. As Cerberus has already hinted, it will probably try to register Bank Leumi USA in Utah, which has not adopted the stringent banking legislation that prevails in most of the US. On the one hand, the sources say, this group has experience in bank management. They have acquired a few banks in the Far East, and streamlined and strengthened them. On the other hand, these owners have specific problems in connection with operating a bank in the US, and they are looking for indirect ways to operate there, perhaps without a banking license. Thats critical for Bank Leumi.

Banking legislation in most states of the US bars the consortium from founding a bank. They can register it in Utah, but its activity will be limited; for example, it will not be able to open current accounts.

The important question is whether it will obtain a license to operate in New York. This may well be forbidden, which will be very significant. A large part of the Jewish community in the US, which is a particular target for Bank Leumi, is concentrated in New York.

The banking specialists say that the group has advantages. It is a strong group, with banking experience, and capital, which can change the character of the bank, and position it as an international bank. It will take a long time, however, before matters in the US are put in order.

To this day, Israel Discount Bank (TASE: DSCT), which a consortium led by Matthew Bronfman bought from the state in August, has yet to find a way through the maze of US banking permits, and the fate of its outstanding asset, Discount Bank of New York, is unclear, as is the fate of the entire acquisition, if the permits are not obtained.

In general, the sources say, there is a problem of identifying the owners. In the Davidson consortium, they know who Bill Davidson is, and in the Zuckerman group, they know who Mortimer Zuckerman is, but who are the people behind Cerberus and Gabriel?

Were I an employee of Bank Leumi, one of these experts adds, a group with a reputation for aggressive streamlining and restructuring would worry me a little. The sources indicate a problem that will surface when the option is exercised. Under the conditions laid down by the Bank of Israel, parties acquiring control of a bank must be personally identified. An unidentified entity can constitute only 50% of the consortium acquiring control.

At the moment, the sources say, they are a financial partner. By the time they exercise their option, however, there must be an identified person. Actually, its not clear who bought, or who in the end will buy, Bank Leumi.

Published by Globes [online] - - on November 16, 2005

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