The much talked about deal for the sale of control in the Israel Chemicals Ltd. (TASE: ICL) group to Canadian company Potash Corp of Saskatchewan Inc. (Toronto :POT) is as a red rag to many Israelis, who are mustering just about every possible argument or potential threat in order to keep Israel Chemicals in Israeli hands. Because of the opposition to the sale, which has spilled over into the political arena, Potash Corp. has announced its intention of withdrawing from the deal.
The removal of the sale of Israel Chemicals from the immediate agenda is a good juncture at which to analyze the advantages and disadvantages of such a sale for the Israeli economy, without prejudging the question. The sale to foreign investors of property rights in a national resource like the Dead Sea naturally arouses fierce emotions, including nationalistic emotions, fears and scenarios of economic threats both tangible and theoretical.
Many Israelis make the tacit assumption that they will not directly benefit from the fruits of the sale, which will be lost somewhere between the defense budget and transfer payments of one kind or another, and they therefore mainly see its negative aspect.
Largest employer in the Negev
In a country in which people are exposed to many outrageous instances of corruption, the transfer of control in Dead Sea Works to Israel Corporation (TASE: ILCO) also looks like the mother of all shady deals. Many are sure that a deal like that mainly benefits wealthy businesspeople, and that the State of Israel and its citizens lose out both ways, being left without rights in the Dead Sea, and without due recompense.
In the past few decades, Israel has privatized several state-owned companies, with no little success, among them El Al, Bank Leumi, Oil Refineries, and others. The relevant government agencies have acquired considerable experience in privatization, and they are advised by global professionals of the first rank. It is therefore fair to assume that control of Israel Chemicals will not be sold for a pittance.
Israel Chemicals is a public company that has a market value on any given day, and a global peer group from which its economic value can be derived. There is therefore no real fear that it will be sold at an uneconomic price. Those who oppose the sale of Israel Chemicals to foreign owners fear that control of Potash Corp. itself could be sold in the future, and that we are liable to wake up one morning to find that the ownership of Dead Sea Works has fallen into hostile hands.
A further threat arising from a sale of Israel Chemicals to Potash Corp. is the threat to employment. Israel Chemicals is the largest employer in the Negev. High taxation of Potash Corp., together with increased royalties that might be agreed in a future deal, will be liable to provide an incentive for it to divert potash production from Israel to foreign sites, in Jordan, for example. Diversion of production to Jordan or a change in transfer prices would hit both state revenues and employment, and so Israel would lose more than it gained.
Employment should be a main consideration when it comes to approving transfer of control in Israel Chemicals to Potash Corp., but this is a question of reaching understandings and embodying them in multi-year agreements.
These are just a sample of the fears and threats involved in a deal of this magnitude, but, although they cannot be dismissed, this does not mean that the deal should be rejected out of hand without being thoroughly examined.
First of all, alongside the inherent threats, deals like these bring with them considerable potential for enhancing the country's holding in this economic resource. Otherwise, it would be on the public agenda at all. Secondly, Israel has a paramount interest in attracting high-quality foreign investors who will generate new jobs, and bring with them innovative technologies and world-class management capabilities. Thirdly, as long as there a good legislative framework and strict enforcement, much of the risk attributed to foreign investment in natural resources disappears. Strong labor laws and strict environmental protection laws do a great deal of the work of reducing the risk of attracting the undesirable kind of foreign investor.
Vital interests
It should be pointed out that, because of the global nature of the potash market, which has steadily become more and more concentrated and in which economies of scale have become the order of the day, Israel Chemicals cannot stay on the spot, because its competitive position is liable to be eroded over time. A creative economic team backed by a first rate legal team is capable of putting together a contract that on the one hand will protect the interests of the country and the workers, and on the other hand will maximize the economic potential for Israel, which more than ever requires economic resources to finance its growing needs. Only a very high price tag, such as can't be refused, justifies proceeding with a deal for the sale of control in Israel Chemicals despite the substantial challenges and threats that a deal of this kind involves.
A good deal is one that is not free of all risk, but that will substantially raise the state's receipts from the Dead Sea, ensure the workers' rights, protect the country's vital interests, and contribute to improvement in the quality of the environment. My first impression is that this is a possible deal, and that the chances of it coming to pass depend largely on the degree of determination on the part of both buyers and sellers.
Published by Globes [online], Israel business news - www.globes-online.com - on March 6, 2013
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