When people think about a kibbutz-owned company, global business is the last thing to enter their minds. Kafrit Industries, however, owned by Kibbutz Kfar Aza (79.3%) is of a different mind. The company is trying to leverage its success in Israel and its financial stability to expand overseas, starting with Europe. Since mid-2002, Kafrit, which supplies raw materials for the plastics industry, has been negotiating to acquire 75% of two British companies for ₤2.5-3 million.
The two British companies have aggregate annual sales of €12 million. Kafrit eventually decided not to acquire one of the companies, because of disagreements and unsatisfactory due diligence. Due diligence has not been performed for the other company, but its acquisition is still being considered. At the same time, in early 2003, Kafrit acquired a German company that manufactures polyethylene-based concentrates for the plastics industry. The deal included a British subsidiary, and manufacturing activity in the Czech Republic. The cost of the deal was €8.9 million, all of which was financed by long-term bank loans an indication of Kafrit’s financial soundness. Including its subsidiaries, the German company has an estimated annual sales turnover of €24 million, compared with €43 million for Kafrit; the deal will consequently greatly expand Kafrit’s 2003 sales.
Kafrit began seriously considering overseas expansion in 2002. Joint managing director David Zveda says the company has already grabbed a very substantial market share in Israel. The company is trying to enter fields in which it enjoys a relative advantage; its goal is to build its global brand name, and increase its market share. 27% of company sales are currently for export, and this will now increase substantially.
Kafrit’s balance sheet is very solid, with NIS 113.5 million in equity, amounting to 62% of its balance sheet total and current assets of NIS 159 million, which is more than three times the company long-term liabilities. The company balance sheet created NIS 8.9 million in financing income in 2002, compared with NIS 12.8 million in the preceding year. The company attributes the fall in its financing income to inflation. Despite its lower revenue from financing, a 13% rise in sales to NIS 190.4 million enabled Kafrit to increase its net profit by 7.7% to NIS 16.8 million in 2002. The European acquisitions are expected to boost company revenue this year.
The aggregate salary cost of the 10 senior company executives is NIS 4.4 million. The company has two joint managing directors, one of whom, a kibbutz member, earned the highest salary in 2002 NIS 520,000. Seven other kibbutz members employed by Kafrit earn NIS 312,000 each. The benefit derived by the kibbutz is not, however, restricted to executive salaries. Kibbutz Kfar Azza also provides the company with laundry, postal, security, catering, and health services, for which it received NIS 2.5 million in 2002. To this should be added NIS 1.7 million in bonuses for meeting profit targets and NIS 169,000 in rent for kibbutz land.
Zveda adds that although the company is kibbutz-owned, it is run as a business. “I enjoy fruitful cooperation with the company chairman, who is also general manager of the Mekorot National Water Company; he isn’t a nobody who used to work in the cow shed. The board of directors is also balanced. The company is managed as a regular business, with professional decision-making. When I make decisions about things like a promotion, I don’t care whether an employee is a kibbutz member or someone hired from outside. Furthermore, we’ve become an international company, which the board of directors accepts with equanimity,” Zveda comments.
”Globes”: If that’s the case, what’s special about Kafrit, as a kibbutz company?
Zveda: ”The only difference is the distribution of the regular dividend, because the kibbutz needs the cash flow. We regularly distribute a yearly 55-65% dividend.”
What about the executive salaries? Are they affected by kibbutz ownership?
”When we were listed on the TASE, we reported the salaries received by kibbutz members, and that hasn’t changed over the years. Nothing has happened in this area, despite the company’s development. As far as the hired company employees, of whom I am one, we want to hire the best, which means we have to compete in the labor market, and offer suitable salaries. I don’t feel that being a kibbutz-owned company puts us at a disadvantage.”
Are your required to accept a certain number of kibbutz employees, at the expense of non-kibbutz employees?
”No. I have no obligation whatsoever. We’re a global firm, with exports to 36 countries; we can’t hire people by geographical location, just because they’re kibbutz members. You can see that almost all the new employees in the company in the mid or upper levels are from outside the kibbutz.”
Have you abandoned the acquisition of the second British company, as you did the first?
”Absolutely not. We’re exchanging draft agreements. I’ve decided that the matter will be settled within a month at most, one way or another.”
Is the German plant profitable?
”It’s not profitable, but it’s close. In any case, our plan is to make it profitable within a year. We won’t get the full effect of it in the first quarter, but it’s expected to add €6.5 million to our revenue in the second quarter.”
Are you looking for more possible acquisitions?
”Acquisitions are a faster, and sometimes a cheaper, way of expanding into fields with higher profit margins. We’re looking for interesting acquisitions, mostly in Europe.”
Published by Globes [online] - www.globes.co.il - on 28 April 2003