Due diligence of Israel Discount Bank of New York, followed by bids for it will be completed by the end of the year, say sources close to the sale by Israel Discount Bank (TASE: DSCT). The sources added that 3-4 foreign entities are expected to carry out the due diligence and bid for the bank. Discount Bank reportedly expects the bids to be around Discount New York's shareholders' equity of $830 million.
Discount Bank chairman Yossi Bachar and outgoing CEO Reuven Spiegel are handling the sale of Discount New York. Spiegel will be succeeded by Lilach Asher-Topilsky before the sale is completed. The bank has hired JPMorgan Chase and boutique bank Sandler O'Neill & Partners to advise on the sale.
Bidders can either bid to acquire Discount New York in full, or to acquire 30% of the bank, with Discount Bank keeping the controlling interest. The latter option is mainly designed for private equity funds, which would sell the stake in a few years when it holds an IPO.
Discount Bank has also sent out feelers to Bank Hapoalim (TASE: POLI) to buy Discount New York. Goldman Sachs is representing Discount Bank in these talks. However, while there is an organized and clear process with the foreign potential buyers, including deadlines and stages, the situation with Bank Hapoalim is more complicated.
The two banks have had initial talks, but they have been frozen for now. Nonetheless, the situation is fluid, and the talks may be renewed. On one hand, banking sources believe that Bank Hapoalim is a classic candidate to acquire Discount New York, and can pay a reasonable price for it, because, unlike private equity funds, it is not seeking to make a quick profit by buying on the cheap, but in making a long-term investment. The fact that Bank Hapoalim is Israeli facilitates the transfer of ownership and would prevent Discount New York's Jewish customers from withdrawing their money, which they deposited mainly because of its Israeli connection.
But mutual suspicion is weighing on a possible deal, since the two banks are rivals. In addition to their business in Israel, Bank Hapoalim has a branch in the US that competes against Discount New York. Discount Bank would like to sell Discount New York to Bank Hapoalim, but it is also worried that if Bank Hapoalim undertakes due diligence, this could expose sensitive business information to Bank Hapoalim. Discount Bank is therefore demanding preconditions from Bank Hapoalim, which the latter might not accept.
Bank Hapoalim is mainly interested in Discount New York in order to expand its overseas business, especially in two niches where Bank Hapoalim sees low-risk growth: private banking in Europe and commercial banking in the US. Bank Hapoalim wants to expand overseas because it sees little growth potential in Israel.
Discount New York is the largest overseas Israeli bank, with $7.1 billion in deposits and $4 billion in credit to the public at the end of June 2013. However, it has low profitability, with a net profit of $18 million in the first half, giving a return on equity of just 4.4%.
Discount Bank decided to sell Discount New York in order to solve its capital problem once and for all. For years, Discount Bank has been focused solely on improving its capital adequacy ratio, which is the lowest of Israel's banks. It has succeeded in closing the gap, but at the cost of freezing business growth and by streamlining. The sale of Discount New York will change this, enabling Discount Bank to meet the capital adequacy target and future regulatory requirements, while still having enough capital to compete against the other banks in extending credit and in business development.
On the other hand, by selling Discount New York, Discount Bank is foregoing an important source of profits, which it will have to find by increasing the profits from its Israeli operations.
Published by Globes [online], Israel business news - www.globes-online.com - on October 21, 2013
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