Timing is sometimes everything in life, and the timing of the privatization of Israel Discount Bank (TASE: DSCT) was especially successful for the Bronfman family. A study by "Globes" found that, six months before the end of the five-year vesting of the controlling core in the bank, the Bronfman Schron group has made a 37% return on its investment, reflecting an annual return of 7.2%, including a dividendThe bank's controlling shareholders made a profit of NIS 478 million in four and a half years.
For the sake of comparison, had the Bronfmans and Rubin Schron Tel Aviv 25 Index shares instead of Discount Bank bought in February 2006, they would have made a return of 33.5%; had they bought Bank Leumi (TASE: LUMI) at that time, they would have had a return of 1%, taking the dividend into account. Had they bought Bank Hapoalim (TASE: POLI), they would have had a loss of 23%.
How did this happen? The controlling core in Discount Bank was formed in late 2004 when the two bidders for the bank - the Bronfmans and Rubin Schron - joined together to create a single entity that negotiated with the state. As the sole bidder in the privatization, they got a good price, buying 26% of the bank in February 2005 at NIS 5.10 per share, for a total of NIS 1.3 billion. The Bronfmans were the dominant party, acquiring 15.6% of the bank, which amounts to 60% of the controlling core. Shron acquired 10.4% of the bank, which amounts to 40% of the controlling core.
Although the Bronfman Schron group bought the stake in February, the deal was only closed a year later. During that year, Discount Bank's share price jumped 45% to NIS 9.20, nearly an all-time high. The price paid to the state had been settled a year earlier, and while the state received 4% interest, the price did not reflect the jump in the share price.
What has happened since? Discount Bank's share fell during the economic crisis, and then recovered. The share closed today at NIS 6.83, giving a market cap of NIS 6.64 billion, which gives Bronfman Schron group's stake a value of NIS 1.73 billion. On the eve of the crisis in 2008, the bank distributed a NIS 250 million dividend, of which NIS 52 billion accrued to the Bronfman Schron group. The cumulative return for the Bronfmans is therefore 37%,
The return could have been higher, had Discount Bank's share price not fallen 23% since the beginning of 2010, resulting in a capital multiple (market cap divided by shareholders' equity) of 0.66.
In any event, a return on investment of 37% is only theoretical for the Bronfmans, if they were to sell their stake today. However, if such a sale actually occurs, there will probably be a control premium, resulting in a larger profit.
Sources believe that when the vesting period expires, the Bronfmans and Schron will want to sell their Discount Bank stakes, and media periodically reports that they have offered the shares to this or that businessman. In 2008, Schron tried to sell his shares to the Bronfmans, but cancelled the deal when the economic crisis caused the share price to fall.
Sources close to the controlling shareholders emphasize that they have no intention to sell, and that they consider Discount Bank as a strategic investment. The sources add, however, that at the right price, estimated at NIS 12 per share (a 77% premium on the current price), they would consider a sale.
Published by Globes [online], Israel business news - www.globes-online.com - on July 15, 2010
© Copyright of Globes Publisher Itonut (1983) Ltd. 2010