"The sale of Discount Bank is an important milestone in foreign investors' attitude towards Israel's capital market," Ministry of Finance Accountant General Dr. Yaron Zalika told "Globes", a few hours after closing the sale of the controlling interest in Israel Discount Bank (TASE: DSCT) to the Bronfman consortium. Zalika is presently in Miami.
"This is another step in the revolution to change the face of Israel's capital market, by bringing about significant involvement of foreign investors. The sale follows the Bachar committee report for dealing with conflicts of interest and over-centralization, which will go through the legislative process soon. It also follows the market makers reform, which for the first time exposes Israel's banks to intense competition from the world's biggest banks. In addition, Bank Leumi (TASE: LUMI) is being privatized through the Tel Aviv Stock Exchange (TASE), and we're working on other important measures that will be announced soon."
"Globes": What about the price for Discount Bank?
"I'm proud of the price, the way the negotiations were handled, and our determination to insist on an acceptable price by taking a calculated risk during the process. We got the market value, despite all the limitations. We knew that we didn’t have a mandate from the public to sell the bank cheaply. I don’t believe in privatization at any cost.
"We held a transparent, trustworthy, fair, and open process. Anyone who wanted could participate in the tender. We began with five participating consortia. We saw the restrictions that Supervisor of Banks Yoav Lehman, a full partner in the process, correctly decided to impose. As a result, we ended up with one consortium, whose opening bid was NIS 976 million. We ultimately agreed on NIS 1.3 billion, to which we added an upside mechanism."
There was always the alternative of selling the bank on the TASE.
"There was never a realistic alternative for selling Discount Bank. Both the Bank of Israel and the Federal Reserve Board in the US, where Israel Discount Bank of New York is registered, insisted on a controlling shareholder for Discount Bank."
What did you mean when you said, 'We got the market value, despite all the limitations'? What limitations?
"We sold a bank without due diligence, without leverage but entirely from equity, with all the money coming from outside, to a foreign entity, for the first time. It was critical for us to limit the entry of partners, to forbid trading in the controlling interest for five years, and for the Bank of Israel to approve any buyer for the shares afterwards. Not to mention the fact that, for the first and only time in the world, we sold a closed bank."
Bank Hapoalim (LSE: BKHD; TASE: POLI) is considered the first Israeli bank to be acquired by a foreign consortium.
"It's hard call the controlling consortium in Bank Hapoalim a foreign consortium. Ted Arison was an Israeli citizen when he bought the bank. The Dankner family are also Israeli citizens. Only some of the controlling shareholders are foreigners. In addition, most of the money came from Israel, from Bank Leumi (TASE: LUMI) and First International Bank of Israel (TASE: FTIN1;FTIN5). In the case of Discount Bank, the consortium is foreign, the money is foreign, and there is no leverage, at the order of the Supervisor of Banks."
There is a state loan.
"There is a $50 million loan for up to three years, at the Accountant General interest rate, in other words CPI-linked plus 4%. That is certainly preferable to leverage from another Israeli bank. Nor is that all that we gained."
What else?
"Don’t forget that Discount Bank has not distributed a dividend for many years, if ever. This bank, because of its losses, does not pay taxes; only its employees pay income tax. Now, with profits, it is using up its NIS 2 billion tax asset from accumulated losses."
That's also a handsome benefit for the buyers.
"We sold them a banking group with excellent potential, and an ability to leverage the dramatic changes the Israeli economy and capital market are undergoing, thanks to the minister of finance's economic plan."
What about Discount Bank's employees?
"There is an agreement in principle between Minister of Finance Benjamin Netanyahu and Histadrut chairman MK Amir Perez. Some details are still outstanding. Next Monday, Senior Deputy to the Accountant General Yuval Bronstein, MI Holdings (State of Israel Properties) representative Yossi Kucik, and the workers' representatives will hold further negotiations. I believe that they will reach a full agreement."
Published by Globes [online], Israel business news - www.globes.co.il - on January 23, 2005