Eliahu seeks Migdal deal financing from Leumi, Hapoalim

Shlomo Eliahu has a[[roached Hapoalim CEO Zion Kenan and incoming Leumi CEO Rakefet Russak-Aminoach for financing for his NIS 4.2 billion acquisition of Migdal.

Shlomo Eliahu is working on a financing package for his acquisition of Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL), after reaching a deal last week to buy Assicurazioni Generali SpA's (BIT: G) 69% stake in the company for NIS 4.2 billion. Over the past few days, he has met Bank Hapoalim (TASE: POLI) CEO Zion Kenan, incoming Bank Leumi (TASE: LUMI) CEO Rakefet Russak-Aminoach, and executives from First International Bank of Israel (TASE: FTIN) to outline his financing needs.

"Eliahu has a lot more sources than appears. He is very liquid, and is not as leveraged as others," a top banker told "Globes".

Eliahu has not yet prepared a financing structure that suits him. He reportedly does not want a banking syndicate, and he has no intention of using an investment bank. Given his considerable financial experience, he will secure a financing package on his own, without brokers.

Delay the sale of Leumi

The picture that emerges in the banking system about the financing suggests that Eliahu will provide NIS 1-1.5 billion in equity for the deal, and will receive NIS 800 million to NIS 1 billion in bank financing for a period of up to three years, as well as NIS 2 billion in short-term interim financing, until he completes the sale of assets. He can offer as collateral part of his Migdal stake (apparently up to a third of the shares he buys), and some of his shares in Bank Leumi (to other banks, not to Bank Leumi itself), and other assets held by Shlomo Eliahu Holdings Ltd.

Eliahu needs interim financing because the sale of assets will take some time, given the poor market climate and the need for regulatory permits. He plans to sell his 9.59% stake in Bank Leumi, worth NIS 1.6 billion, on the market in small blocs. He wants to delay a sale as long as possible, because the bank's shares are currently traded at a multiple of 0.7 on its equity.

Eliahu will also sell his 27.1% controlling core in Union Bank of Israel (TASE: UNON), worth NIS 200 million, and the life insurance portfolio of Eliahu Insurance Company Ltd., which manages NIS 1.3 billion in assets.

Following the acquisition of Migdal, Eliahu may sell 9% of the company, keeping a 60% stake, enough to give him control. The current value of these shares is NIS 500 million.

Insurance industry sources believe that Eliahu will only sell to Migdal Eliahu Insurance's non-life insurance activity. Eliahu Insurance has NIS 1.4 billion in shareholders' equity, including 2.86% in Bank Leumi shares, worth NIS 500 million. Eliahu Insurance's equity above the regulator's minimum totals NIS 600 million, and can be released with the sale of the insurance business. However, any acquisition of the company's operations by Migdal would be a parties at interest deal and require a valuation and approval of Migdal's general shareholders meeting.

Insurance industry sources estimate the value of Eliahu Insurance's non-life insurance portfolio at NIS 250-300 million. Whether Eliahu decides to sell the whole company to Migdal or just the non-life insurance portfolio will be partly a matter of tax considerations.

A regulatory dilemma

In addition to securing bank financing, Eliahu will seek the necessary permit from the Bank of Israel. He has not yet officially presented the Migdal acquisition to Supervisor of Banks David Zaken, or the significance of the deal and how he intends to overcome regulatory problems.

Sources close to the process expressed understand of his problems. "It's not reasonable to sell 10% of Bank Leumi overnight," said a source. They doubt that the Bank of Israel will present obstacles to the deal, and that it will help Eliahu reach a reasonable solution.

Eliahu's holdings in Bank Leumi and Union Bank are a regulatory obstacle. His 9.59% stake in Leumi is based on an extraordinary permit received a decade ago, since he already owned the stake when the 4.99% threshold above which a Bank of Israel permit was required was introduced. Since Migdal owns Bank Leumi shares through assets of long-term savings clients, Eliahu's stake in the bank will rise to 14%. Therefore, in order to control Migdal, he must obtain Zaken's permission.

As for the Bank Leumi holding, the Bank of Israel can, if it wants, give Eliahu an extraordinary holding permit for a limited period. Such a permit would include explicit conditions for the transfer of shares to a trustee, selling them within a designated time frame, and restricting the time that the trustee can hold them. Clear rules about what Eliahu can and cannot do with these shares, such as voting rights in the bank's general meetings and on the board of directors, will also have to be set

The Union Bank landmine

As it happens, Eliahu's stake in Union Bank, which is much smaller in financial terms, could be the main problem, as the law forbids controlling both a bank and an insurance company. Zaken may not have the authority to grant Eliahu a permit to transfer his Union Bank shares to a trustee until they are sold.

The Bank of Israel is examining the legal aspects of the matter, and clarifying the Banking Supervisor's authority in it. If Zaken does not have the authority to allow Eliahu to transfer the bank shares to a trustee and sell them within a designated time frame, he will have to sell the shares before obtaining control of Migdal. Since these shares are part of the controlling core of the bank, the sale could take a long time, and even if a buyer is found, the Bank of Israel will have to conduct due diligence on it.

Migdal's share price fell 1.2% today to NIS 5.50, giving a market cap of NIS 5.8 billion.

Published by Globes [online], Israel business news - www.globes-online.com - on March 15, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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