First International Bank of Israel (TASE: FTIN1 ;FTIN5) and Israel Discount Bank (TASE: DSCT) are leading the bidding for Bank Otsar Hahayal Ltd. Bank Hapoalim (LSE:BKHD; TASE:POLI) is expected to complete the sale of the bank this week. Offers for Bank Otsar Hahayal range between 170% and 180% of its shareholders’ equity: NIS 1.1-1.2 billion.
The Bank of Israel ordered Bank Hapoalim to sell Bank Otsar Hahayal no later than next Thursday, February 2.
Bank Hapoalim owns 68% of Bank Otsar Hahayal, and will therefore make NIS 730-860 million on the sale. Since Bank Hapoalim lists Bank Otsar Hahayal at a value of NIS 395 million in its books, Bank Hapoalim can be expected to make a net capital gain of NIS 200-280 million on the sale.
Banking sources nonetheless believe that Bank Hapoalim will probably claim that it should pay a lower tax rate on the sale, because the sale was imposed. “The rationale is the same as for an expropriation. Bank Hapoalim is being forced to sell an asset against its will. Under these circumstances, the tax rate should be half the normal rate,” said an attorney who is an expert in the field. A lower tax rate will save Bank Hapoalim NIS 70-90 million.
During discussion on the Bachar capital market reform legislation, Adv. Ram Caspi, who represented Bank Leumi (TASE:LUMI), made a similar case for enforced sales. At the time, Caspi demanded a discount on the capital gains tax from the sale of mutual and provident funds.
By law, the proceeds from an expropriation is taxed at half the usual rate. The company tax is currently 34%. The Israel Tax Authority rejected the banks’ argument at the time. Current Tax Authority senior deputy director of professional matters Jackie Matza agrees with this position.
Another topic in the negotiations is the NIS 37 million a year in computer services Bank Hapoalim provides Bank Otsar Hahayal. Bank Hapoalim wants to continue providing these services to Bank Otsar Hahayal in a long-term contract as part of the sale.
A senior banker said, “Bank Hapoalim’s demand is irrelevant. The Bank of Israel does not usually allow a bank to purchase computer services from competitors, and definitely not for a period of several years.” The source predicted that the Bank of Israel would compel the buyer of Bank Otsar Hahayal to sever its ties with Bank Hapoalim’s computer system within two years of the acquisition at the most.
Published by Globes [online], Israel business news - www.globes.co.il - on January 23, 2006