Implementation of the Business Concentration Law is likely to lead to dramatic change in the ownership structure of Israel's banks, and, in an extreme but not entirely unlikely scenario, to a situation in which all the banks (apart from Bank Hapoalim (TASE: POLI)) will be without controlling cores and will be owned by the general public. Yesterday, the Knesset passed the Business Concentration Law which states that anyone who owns a major non-financial corporation cannot own a major financial corporation. A major non-financial corporation is defined as one with turnover above NIS 6 billion, while a major financial corporation is defined as one with a balance sheet footing greater than NIS 40 billion.
In addition, a company declared a monopoly in any sector will be defined as a major non-financial corporation if its annual sales in that sector are NIS 2 billion or more.
The implementation of these provisions is likely to affect the control structure of First International Bank of Israel (TASE: FTIN), Mizrahi Tefahot Bank (TASE:MZTF), and Leumi Card. The holders of the controlling interests have six years in which to sell one of their holdings, and a lot could happen in that time, but still, let's have a look at their options.
1. Zadik Bino will prefer to sell Paz
Zadik Bino is considered a conservative businessman. For years, unlike some of his contemporaries, he has been careful not to expand and diversify into a range of sectors, but despite that he finds himself one of the main victims of the Business Concentration Law, and he will have to sell one of his two main holdings, either First International Bank or Paz Oil Company Ltd. (TASE:PZOL). Bino owns 48.3% of First International, worth NIS 2.7 billion, and 33% of Paz, worth NIS 1.9 billion. In both companies, his holdings are together with the Liberman family of Australia.
It was thought in the past that Bino would do a share swap with the Libermans, and that he would remain with one holding and they with the other. However, it seems that the chances of this happening are slim, mainly because the shareholders today are the younger generation of the Liberman family, whose involvement and interest in the Israeli market are lower than that of their parents who ventured into investments here. It is therefore doubtful whether they will wish to hold control of a local company and be active in it.
Bino will probably prefer to try to sell Paz first rather than First International. The reason for that is that it is easier to sell control of an energy company than of a bank. There are not too many people around today interested in buying control of a bank, both because of the sharp drop in dividends that the banks pay (First International does pay a dividend, but much less than in the past), and because tight regulation does not allow the controlling shareholder much room for involvement in running the bank. We received evidence of the banks' low popularity last week, when the Bronfman-Schron consortium decided to sell its holding in Israel Discount Bank (TASE: DSCT) on the capital market, and not to a controlling shareholder, even at the cost of foregoing a control premium. As a thoughtful businessman, Bino will not be in a hurry to give up the control premium. If no suitable buyer is found for Paz, Bino will presumably plump for First International, but, like Bronfman-Schron, he will do so through a distribution on the market, and so First International Bank will become another bank with no controlling core.
2. The complicated story of Mizrahi-Tefahot
At Mizrahi-Tefahot, the situation is more complicated. Israel's third largest bank is controlled by the Wertheim family (22%) and by Leora, Doron, and Eyal Ofer (22.7%). There is doubt over what effect the Business Concentration Law has on each of the sides in the controlling core. In addition to control of the bank, Moshe (Mozi) Wertheim also controls the Central Bottling Company (Coca-Cola Israel). This is a private company, and it is not clear whether it should be considered a major non-financial holding (that is, whether its sales total more than NIS 6 billion). Its sales are estimated at NIS 4.5-5 billion annually. However, a company declared a monopoly will be considered a major non-financial corporation if its annual sales in the category in which it is a monopoly amount to more than NIS 2 billion. The Central Bottling Company is considered a monopoly in cola beverages, but again, it is not clear whether its sales in this category exceed NIS 2 billion. So there is uncertainty over whether Wertheim will have to sell one of his holdings, but it is clear that if he does, he will choose Mizrahi-Tefahot.
Wertheim recently transferred his shares in the companies to his children, with two-thirds of the shares, both in Coca-Cola and in the bank, going to his son David (Dudi). As far as is known, David Wertheim is not very involved in Mizrahi-Tefahot, and, unlike his father, he is not a director there.
As for the Ofer family, the position there is even more complicated. First of all, the shares are held by three parties: Leora Ofer and the brother with whom she is in dispute, Doron Ofer, and their cousin Eyal Ofer. As well as the bank, the Ofer family owns real estate company Melisron Ltd. (TASE: MLSR), one of the biggest players in shopping malls, and a company that comes within the definition of a major non-financial corporation. The Ofer family has several possibilities. It could sell some of the malls, and thus bring Melisron below the qualifying threshold for a non-financial company, and it could also swap some of the credit it has for credit from foreign sources, which would also enable it to evade the restriction on a major non-financial corporation.
Another possibility is a distribution of shares within the family, with Leora Ofer, who is a specialist in malls, remaining with Melisron, and Eyal Ofer, who is thought to hold the bank dear, remaining with Mizrahi-Tefahot. The question then will be which side Doron Ofer will choose, and whether, given his strained relations with Leora, he will let such a deal happen.
The third possibility is again a sale of the bank, and in this case too that would probably happen via the market, with no control premium. Another interesting question is what will happen if only one of the controlling shareholders (Wertheim of Ofer) gives up control of the bank? Will the controlling interest break up, or will the Bank of Israel allow the other side to control the bank with 22% ownership. Since Shari Arison controls Bank Hapoalim with a similar sized shareholding, it could be that the Supervisor of Banks will allow it.
3. Azrieli will solve the conundrum with Sonol
Someone else affected by the Business Concentration Law is David Azrieli. Azrieli controls Azrieli Group Ltd. (TASE: AZRG), the biggest player in shopping malls, and he also owns 20% of credit card company Leumi Card (Bank Leumi (TASE: LUMI) owns the other 80%).
On the face of it, Azrieli should sell his holding in Leumi Card, but he will probably solve the problem in another way. Azrieli is currently seeking to sell fuel company Sonol Israel Ltd,, which he controls. He has even set up a situation room for promoting the sale, and various interested parties have been named in the press. Azrieli is determined to push ahead with selling the company. If he does manage to complete a sale, he will remove the group from the definition of a major non-financial corporation, and so will be able to continue holding his shares in Leumi Card.
Published by Globes [online], Israel business news - www.globes-online.com - on December 11, 2013
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