It's no secret that one of the reasons for the plunge in trading volume on the Tel Aviv Stock Exchange (TASE) in the past few years has been the decline in listed companies. This trend is liable to get a regulatory push, after the Knesset Finance Committee last week approved the pyramids clause in the Concentration in the Economy bill limiting business pyramids to just two layers. The clause also applies to private companies which have publicly-traded bonds on the TASE.
The bill means that, in the next four years, the controlling shareholders of business pyramids will have to merge companies at the base of the pyramid or sell them. The result could be the delisting of more than 30 companies, 12 of which are listed on the Tel Aviv Index, such as IDB Holding Corp. Ltd. (TASE:IDBH) units Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL), Shufersal Ltd. (TASE:SAE), and Given Imaging Ltd. (Nasdaq: GIVN; TASE: GIVN).
This comes after more than 100 companies have been delisted from the TASE in the past few years, reducing the total of listed companies to 524. The main reason for the decline is the heavy costs associated with a listing and tight regulation, as well as the structure of equity offerings and thin trading.
An examination by "Globes" found that the aggregate market cap of companies liable to be delisted from the TASE, unless they are sold to a third party or acquired by their direct parent company, amounts to 10% of the current total equity of TASE companies. The total public holding in these companies is NIS 10 billion.
The Ministry of Justice exempted in Concentration in the Economy bill energy exploration partnerships in its definition of a company in a business pyramid layer. The final regulations will stipulate whether these partnerships will be included or excluded from the law. Many exploration partnerships are at the lower levels of business pyramids of holding companies, and if the law applies to the partnerships, they could be delisted. Delek Group Ltd. (TASE: DLEKG) units Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling LP (TASE: DEDR.L), as well as Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L), all of which are listed on the Tel Aviv 25 Index, are three such limited partnerships.
The immediate impact of the law on TASE trading volumes will not be great. "The law states what will happen in four years. At the moment, no one has to do anything, and things will continue as is," Adv. Shlomi Turgeman, of the S. Turgeman law firm and lecturer at Bar Ilan University and the Sha'arei Mishpat Law College, told "Globes".
Turgeman says that the law should come into effect within a year. "This is acceptable because when dealing with restraint on trade, mergers and acquisitions, the Antitrust Authority orders the sale of holdings in another company. If the sale is not carried out in time, the holding can be held by a blind trust and the controlling shareholder will have no involvement. There is no reason why this should not be the case here," he says. "Four years is an awful timeframe because it allows the failures in corporate governance to continue."
Turgeman adds that even if the companies at the base of a pyramid are excellent companies, they currently do not consider only their own interests, as corporate governance requires. "If Cellcom, Shufersal, or Koor were only to consider their own interests, they would have invested in infrastructures and become more competitive, but they have to service the debt of their parent company [IDB]. I want to believe that, in future, the pyramid will not be a factor, but the law does not immediately solve the current situation."
IDB will take the biggest hit
IDB Holding, which is in the throes of a power struggle, is the conglomerate which will take the biggest hit from the Concentration in the Economy bill. All of IDB's operational companies are found in its third pyramid layer or lower. This will force IDB chairman Nochi Dankner, or whoever wrests control of the company from him, to undertake financial measures to reduce the layers in the business pyramid and holding companies, or to sell some of the subsidiaries.
The Concentration in the Economy bill also bans holding companies from holding both financial and non-financial companies. This will force IDB to sell Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), which is currently situated in the third pyramid layer, in any case.
The Concentration in the Economy bill will have little impact on Delek Group, controlled by Yitzhak Tshuva. Even though the company has numerous public subsidiaries and wholly-owned subsidiaries which have issued bonds, the group's structure is more horizontal (holdings in a large number of companies at each level of the business pyramid), and is less vertical that IDB. Delek Group has only two companies - The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5) subsidiaries Excellence Investments Ltd. (TASE: EXCE) and Mehadrin Tnuport Export LP (TASE:MEDH) - at its third pyramid level. Delek will have to sell control in Phoenix under the separation of financial and non-financial holdings clause in the Concentration in the Economy bill, solving the pyramid problem.
Other conglomerates will have to adjust their pyramid structure. Gazit-Globe Ltd. (NYSE: GZT; TASE: GZT) parent company Norstar Holdings Inc. (TASE: NSTR), controlled by Chaim Katzman and Dori Segal, in which Dori Group Ltd. (TASE: DORI) and U. Dori Construction Ltd. (TASE: DRCN) are found at the second and third pyramid layers, respectively. Equital Ltd. (TASE:EQTL), controlled by Kobi Maimon, which includes eight companies and limited partnerships at various levels, and which will have to restructure to comply with the law. Kardan NV (TASE: KRNV;AEX:KARD), controlled by Yosef Grenfeld and Avner Schnur, in which Kardan Real Estate Enterprise and Development Ltd. (TASE: KARE) and Kardan Vehicle Ltd. (TASE: KVCL) (Avis Israel) are found in the third and fourth pyramid levels, and will have to be restructured.
Shaul Elovich's Eurocom Group, which controls Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) through Internet Gold Golden Lines Ltd. (Nasdaq: IGLD; TASE:IGLD) unit B Communications Ltd. (Nasdaq:BCOM; TASE: BCOM), will have to consolidate the companies under the law. Africa-Israel Investments Ltd. (TASE:AFIL), controlled by chairman Lev Leviev, could solve its pyramid problem of Africa-Israel Residences Ltd. (TASE:AFHS) through the offer to purchase by its parent company, Danya Cebus Ltd. (TASE: DNYA).
What is the Concentration in the Economy bill's effect on the TASE? After all, the number of listed companies will likely fall.
Turgeman: "I actually think that the situation will improve in the long term. The TASE is not thriving right now, because there are several players which turn up again in all kinds of companies and forms of holdings. The public sees the write-offs, the improper corporate governance, and the self-serving tycoons, which is why investing in the TASE only suits financial players who know how to get in and get out in time.
"The original purpose of a sophistical capital market is for the public to channel money to the TASE because it is the right place to make profits in a sound way. The TASE has dried up because public confidence has eroded, and regulation doesn’t help either. The moment the masquerade ball is over, in other words, when the same players don’t appear in different forms, it will be easier to restore public confidence."
First target the pyramids
The Promote Competition and Reduce Concentration in the Economy bill, aka the "Concentration bill" is based on the Committee to increase Competitiveness in the Economy's recommendations. The committee, chaired by former Ministry of Finance director general Haim Shani, examined ways to deal with structural problems in the Israeli economy. It concluded that the economy suffered from over-concentration compared with other economies, reflected in part by the small number of businessmen who control a substantial part of the economy's financial and non-financial assets.
This control is achieved through conglomerates with pyramid structures. The committee expressed concern that this centralized structure was liable to affect the soundness of the financial system, competition, and the public's savings, as well as minority shareholders in public companies and bondholders.
The Shani Committee focused on three issues: reducing concentration in the economy as a whole; restricting the activity of business pyramids; and the holdings in major financial and non-financial holdings by the same controlling shareholder. The government adopted the committee's recommendations in April 2012, and the Knesset passed the bill in its first reading last summer. However, the Knesset Finance Committee's discussion of the bill was delayed by the elections.
The Finance Committee, under its new chairman, MK Nissan Slomiansky (Habayit Hayehudi) resumed its discussion of the Concentration in the Economy bill a few days ago. Last week, it approved the pyramids chapter in the bill, which limits business pyramids to two levels. The committee approved the clause which gives the finance minister the authority to exempt a company from the law, subject to consulting with the chairman of the Israel Securities Authority.
The Finance Committee also approved the clause which states that when the law comes into effect (after its approval by the Knesset plenum), most directors of companies in a business pyramid's third or lower levels will be independent directors appointed general shareholders meetings within three months. It approved the clause which states that the sale of such a company requires the agreement of at least 50% of the shareholders instead of 95% (which is supposed to make it easier for the controlling shareholder to fold a pyramid by buying the public's stakes in companies). It also approved the clause which states that if the management of a company at the base of a pyramid breaks the law, the Securities Authority will impose financial penalties against it.
The Finance Committee also decided that the timeframe for the sale of companies at the base of a business pyramid will be set toward the end of the work on the Concentration in the Economy bill as a whole. The timeframe will apparently be set at up to four years.
Published by Globes [online], Israel business news - www.globes-online.com - on June 2, 2013
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