Ampal is one of the most long-standing "Israeli" companies on Wall Street. The quotation marks indicate that Ampal is, in fact, a US company, most of whose investments-holdings are in Israel.
A Lehman brothers analyst recently published a report on Ampal, or rather an update of a previously published study, determining that the share is trading at half its asset value. The analyst claims, in effect, that the company's true value should be $240 million, whereas its current value is $131 million. These figures are quoted in real terms, leaving out the Wall Street dream component.
In the present state of the markets, with most share prices sky high, investors seek "values", and Ampal unquestionably represents economic values. The question is why, in fact, is the share stuck at rock bottom prices. How long will it remain stuck there? Is there any chance of the share being "discovered"?
Ampal is owned by the Steinmetz family. The family, which deals in everything from diamonds through real estate to high-tech investments, once acquired 27% of the company's shares from Bank Hapoalim at $7-8 per share. Since that original acquisition, the family has managed to buy enough on the market to increase its holdings to 42%-43%. The average per share price in these transactions was much lower, in our opinion an average of less than $5.5 per share.
Be that as it may, the acquisition range was $4.8 - $5.8. The family is still picking up Ampal shares on an almost daily basis. Rebar Financial Corporation, owned by the Steinmetz family, purchased 116,400 Ampal shares between January 1998 and end of June 1998. Both the Steinmetz brothers and the son, Ampal board chairman Raz Steinmetz, are constantly purchasing the company's shares.
How is it possible to purchase 20% a company's shares on the market without causing the share to rise? To do that, one needs to know how to gather shares on Wall Street, and be thoroughly familiar with workings of the stock market. Raz Steinmetz is undoubtedly a very wily "stock exchange fox". While the family is certainly well versed in capital market lore and behaviour patterns, the son is even more adept. This should be borne in mind when considering the rest of the story.
When a body like the Steinmetz family attempts to gain control of a company whose shares are traded on the stock exchange, it does so for precisely the same reason as it acquired a hefty stake in the Canary Wharf project in London or various real estate assets in New York. To make money. Lots of money.
Anyone keeping track of the fortunes of this family will find that it acts in accordance with the time-honoured principle of buying cheap and selling dear. The Steinmetz family acquired its real estate at a time when prices had bottomed out. Today, rest assured, they are disposing of their New York properties.
Acquisition of control in Ampal is a type of deal that is somewhat uncharacteristic of businessmen of this sort, since the acquisition exposes them to the public. We have already learned that when discreet businessmen, who hate the media like the plague, decide to gain control of companies whose shares are traded on the stock exchange, they do so only if the shares do not reflect the company's true asset value.
The idea is to gain control of the company at the lowest possible price. The businessmen then approach the public with a tender offer, and the public company becomes a private one. If they manage to purchase the public's shares cheaply, they will have achieved their aim. Please file this away for future reference, too.
How much did the acquisitions cost?
Then along come those seasoned businessmen, the Steinmetz family, hailing from the diamond trade, where the staple diet is confidentiality and the shunning of public exposure, and they buy 27% of the company's shares from Bank Hapoalim at $7.8 per share. Obviously, they perceive values far higher than the price they paid.
By the end of June, 1998, the family already holds 10.2 million ordinary shares of Ampal, out of 23.8 million company shares. Which is to say that, as of June 30, 1998, the family holds 42.76% of capital and voting rights.
Through US stock exchange purchases, the family picked up 15.76% of share capital, or 4 million shares, at prices of between $4.8 and $5.6. How does one purchase four million shares on the stock exchange in a company of very low marketability, when everybody knows that the share is trading at half its real asset value? Presently, we will explain how this is done without raising the share price. We will also ask why the Steinmetz family is continuing to scour the market. But first to the matter of value. One need not be a senior analyst to realise, straight away, that if we can purchase all Ampal's shares at $8, we will do so. $8 means a market value of $190 million. If we were Warren Buffett, we would publish a tender offer at $8, and even round up to a value of $200 million as a bonus, and then we have acquired one dollar at 83 cents, according to a check run recently by Lehman Brothers in London.
If we could swing it, we would take serious management boards for each of Ampal's sectors and sub-sectors of operations, and very gradually, either issue or sell the various companies to a third party, retaining only those fields of activity in which we ourselves excel. We promise that total profits accruing to the family from such a process would bring the tender offer price to a comparatively ridiculous level.
The Steinmetzes trod a fairly obvious path. They first bought 27%, and then started amassing shares. They did this, evidently believing that they would be able to acquire the remaining 6.2 million shares (26.22%) from Bank Hapoalim.
Bank Hapoalim under new management
On the way to the take-over, a "terrible" thing happened in Israel. Bank Hapoalim was partly privatised, control passing to seasoned businessman. Time was when various odd deals could be concluded with Israeli banks under government control. In most cases, in the past, private businessmen managed to acquire "business stakes" from banks and other government corporations, at what were, from their point of view, wonderful prices.
We may safely assume that when the Steinmetz family tendered an offer for the balance of the shares held by the bank, those on the receiving end of the offer were not the people who sold the original 27%. Bank Hapoalim evidently factored in considerations of its own. Without a shadow of doubt, the bank would like to sell the percentages it still holds, but wants an economic price for them.
We believe that what Bank Hapoalim would consider an economic price is at least as much as Ms. Horovitz of Lehman Brothers believes, which is to say $10 per share. This means paying a dollar for a dollar's worth, hardly what a good businessman aspires to do. And members of the Steinmetz family are far more astute than the general run of "good businessmen".
So what do you do when you hold 27% of a company like Ampal, and acquiring another 25% in a one-off deal looks very difficult? Either you sell, or you try to extract the maximum. Selling is also very well worthwhile from a business point of view, if you can increase your holdings cheaply.
We told you to bear in mind that Raz Steinmetz (the son), is highly adept in everything pertaining to the stock exchange. He investigated and found that, with patience and persistence, a share like Ampal's could be amassed on the marked. The question was, how to go about it. The capital market is not fond of the Ampal share, for the same reasons as it was not fond of PEC and Elron. Holding companies lacking a focus and lacking a dream (look what happened in Elron since it began to focus on the sale of information technologies. The market is beginning to take an interest and to buy).
"Ampal", confided a US broker who is keeping track of "Israeli" shares, "lies there like a huge hippopotamus in a swamp with only his eyes showing above water, and his tremendous body concealed". "So what if the share is worth twice as much? What's in it for us?", investors query. For anyone familiar with the Wall Street scene, this situation is perfect for those wishing to glean shares quietly and efficiently.
How are shares picked up on the market?
You contact two or three professional brokers, who are good at working on the quiet, and are well networked. You explain your game plan, and they do the work. The Americans have developed this technique to a fine art, and Raz Steinmetz, true to his family's reputation, does a great job of it.
In the three months April, May and June, the family purchased 697,00 shares. In those three months, average daily turnover was 13,700 shares. Since turnover is computed in both directions, this actually amounts to 6,800 shares daily. There are 20 trading days in an average month, so the Steinmetz family's market purchases amounted to 17% of turnover in the said three months, and the price never budged an inch. That amounts to a substantial success, even if they have already been doing it for a year and a half.
Ampal's paid-up capital is composed of three types of shares. "A" ordinary shares, preference shares paying a 6% cumulative dividend (there are 952,891 such shares, each exchangeable for 5 "A ordinary shares) and preference shares paying a 4% cumulative dividend (there are 177,742 of these, each exchangeable into 3 "A" ordinary shares). Altogether, on dilution, there are 29.1 million "A" ordinary shares, of which the Steinmetz family holds 10.2 million, or 35%, and Bank Hapoalim holds 6.25 million, or 21.46%.
This figure seems more accurate than the one we cited to begin with, undiluted in respect of the preference shares. Undiluted, Bank Hapoalim holds more than 25%, and that is against the law. The preference shares are non-marketable, and scattered throughout the United States and Israel, but nobody knows where. For some reason, the press quotes the preference shares at 4%, even though they are not marketable (the share price is multiplied by three). The company also has options on the market, but their exercise price is such that they will probably expire unexercised.
Thus the Steinmetz family can behave as if they hold 43%. That is precisely the problem. In theory, they can make the public a tender offer at $7.5, but in a case like this, the shares purchased from the public would have been written off (converted into Treasury Stocks), and Bank Hapoalim's relative share would have increased enormously.
So what is to be done in cases like this? Taking the company off the stock exchange apparently won't work, at the price the Steinmetz family would want. Bank Hapoalim is in the way. So, again, either find someone to pay a high price for the package you have garnered, or go on quietly picking up shares, while squeezing the bone marrow out of the investors, and then, when you reach a maximum quantity, start upgrading the assets and the share price.
We have no doubt that the second alternative is the only viable one, unless Bank Hapoalim, for some reason, alters its policy and sells to the Steinmetz family at an economic price. In our opinion, the Steinmetzes will go on picking up the share quietly, while trying to maintain the lack of public interest in the share. This will continue until they find that each additional acquisition sends the share price soaring, and then they will take a well known investment bank, mount a great road show, and provide Wall Street with the dream it is seeking.
Ampal has a little problem, and that is taxation. American taxation. If Ampal issues MIRS, it will pay capital gains tax in the United States. It would be better if they could relocate Ampal to Israel, but that will be very difficult.
All right, so what is the bottom line? Ampal is a share that is suitable for anyone who can wait it out patiently. The downward risk is very low. The possible upward reward is very great. But, as stated, it takes professionalism, money and time to do a proper job of picking up the share, and the Steinmetzes are very well endowed with all of the above. So you may have to sit around for a long time, but in the end, it will be stupendously well worth it.