1. The Shufersal sale is a victory for the social protest
The bad men at Nochi Dankner-controlled IDB Holding Corp. Ltd. (TASE:IDBH) capitulated to the social protest and sold Israel's largest supermarket chain Shufersal Ltd. (TASE:SAE). Trumpet the arrival of the Messiah. Prices will fall and Shufersal will no longer be the same power-hungry supermarket that charges high prices. What a nice fairy tale, but as is the case with fairy tales, it has no basis in reality.
Matthew Bronfman and Shalom Fisher's Bronfman Fisher Investments Ltd. is already a shareholder in Shufersal, and Fisher is the company's chairman. Will the supermarket's business strategy change by the change in their status from minority to majority shareholders? It is possible that the exorbitant executive pay at Shufersal - NIS 21 million a year to its two CEOs and two chairmen (who serve a 25% position each) - may be reduced, but nothing more.
Fisher, Bronfman and Leo Noe paid NIS 2.4 billion for the controlling interest in Shufersal at a 50% premium over its market cap. Much can be said about these three men, but they are not philanthropists. They bought Shufersal to make a profit, and we can guess who will pay the price.
A few years ago, Noe acquired Azorim Properties Ltd. from Dankner. Earlier this year, he sold the company, renamed British-Israel Investments Ltd. (TASE: BRTS), to Melisron Ltd. (TASE: MLSR), controlled by Ofer Investments Ltd.. Noe used the proceeds to buy Shufersal from Dankner.
This game of musical chairs by Israel's businessmen has little affect on the country's consumers, and whatever effect results - it is negative. The change in ownership at Tnuva Food Industries Ltd. is a salutary lesson.
2. Nochi Dankner sold Shufersal because of the committee on over-concentration in the economy
Dankner sold Shufersal for two very good reasons: he is a businessman who got a good offer; and he made a big mistake that jeopardized his empire when he acquired the supermarket, and is now paying the price to correct it.
There is no reason to elaborate on the first reason: the price is right, and even if the seller's loan is taken into account, Dankner made a good deal, especially in view of very real future threats to supermarkets' profit margins.
The second reason needs elaborating. A few years ago, Dankner gambled and acquired shares in Credit Suisse Group AG (NYSE: CS; SWX: CSGN; XETRA: CSGZ) through IDB unit Koor Industries Ltd. (TASE:KOR). It was irresponsible in some sense, but it paid off and IDB made billions in capital gains. But instead of leaving the table, like a compulsive gambler, Dankner redoubled the bet, and Koor invested billions in the Swiss bank.
The current financial crisis in Europe has hit bank shares hard, and Koor's profit has turned into a huge loss. Dankner is infatuated with the investment and cannot admit that he made a mistake. Instead of cutting his losses and selling his Credit Suisse shares, he is holding on to them and injecting capital into Koor to shore it up. The capital market has reacted aggressively, sending the yield on bonds of Koor and Israel's strongest conglomerate, IDB, soaring to junk bond status. Even the perennial tardy Standard & Poor's Maalot Ltd. has realized that there is a problem and downgraded IDB's bonds.
There is no question that the committee on over-concentration has put pressure on Dankner, but the deciding factor to sell Shufersal was his business mistake and IDB's need to reduce its huge debt. The sale of Shufersal and Makhteshim Agan Industries Ltd. (TASE: MAIN) will give IDB breathing room and lower the pressure on its bonds.
3. Pyramids are Israel's no. 1 economic problem
Business pyramids, otherwise known as holding companies, are a problem. Pyramids in which the controlling shareholder indirectly controls companies results in negligible holdings at the base. In effect, the controlling shareholder risks little of his own money even as he has a monopoly on decision making. This is a serious problem that requires active treatment by the Israel Securities Authority, which asserts that this is the biggest problem in the Israeli economy. It is a question, however, if that is really the case.
Here is a hypothetical scenario: a US billionaire were to turn up tomorrow and buy IDB because he does not lack for cash. He then decides to flatten IDB's pyramid structure by buying all the minority stakes in the holding companies to increase his stakes in Discount Investment Corporation (TASE: DISI), Clal Industries and Investments Ltd. (TASE: CII), Koor, Clal Biotechnology Industries Ltd. (TASE: CBI), and Elron Electronic Industries Ltd. (TASE: ELRN) to 100%, and achieves 70% stakes in their subsidiaries. It is doubtful if this would solve the problem of IDB.
The way in which IDB chooses to control its subsidiaries - through a pyramid or any other geometric structure - is immaterial. The company employs plenty of lawyers and experts in corporate governance, but the problems that IDB creates are because of it is a large and powerful company in almost every sector in the Israeli economy. It is a company that sometimes acts in a ruthless and unrestrained manner.
It is necessary to put the cards on the table. Even after the sale of Shufersal, Makhteshim, and Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), IDB will be a solid and giant conglomerate. That is why a public debate is needed whether to dismantle IDB into its constituent units just as the US federal government broke up Rockefeller's Standard Oil Company in the trust-busting heyday over a century ago.
Published by Globes [online], Israel business news - www.globes-online.com - on October 16, 2011
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