Migdal Insurance (TASE: MGDL) officially signed an agreement yesterday to sell 50% of Migdal Capital Markets to Bear Stearns (NYSE:BSC) subsidiary Bear Stearns Asset Management Inc. (BSAM). Migdal CEO Izzy Cohen said the collaboration with Bear Stearns made Migdal ready for the reforms of the coming years. "We'll get experience, know-how, and products," he said.
In view of the collaboration, Migdal and Bear Strearns are expected to jointly bid for banks' mutual and provident funds. A key clause in the agreement is exclusivity in mutual funds, advanced training funds, portfolio management, and an arrangement for jointly acquiring mutual and provident funds. For any acquisition Migdal contemplates, such as the acquisition of a bank mutual or provident fund, Migdal Capital Markets will have first refusal rights.
Testing the water
The Migdal Capital Markets deal will be made at a company value of $22.6 million (NIS 100 million), less than the original company value, because Migdal Capital Markets distributed a NIS 10 million dividend in December 2004. Migdal will report a capital gain of NIS 12 million. Bear Stearns and Migdal undertook to inject NIS 5 million each in owners loans into Migdal Capital Markets.
The agreement also stipulates that Bear Stearns will have a Call option for 120% of the shares' market value. It will also have a Put option for 80% of the shares' value. The options have a three-year vesting period.
BSAM CEO Richard Marin said the expected reforms in Israel's capital market were very intriguing, and that the Israeli market had the potential for significant growth. "We sought an Israeli partner and chose Migdal," he said. He believes that after Bear Stearns "tests the water", other foreign companies, such as Lehman Brothers (NYSE:LEH) and Goldman Sachs (NYSE:GS), would also come.
Migdal chairman Aharon Fogel predicted that Migdal and Bear Stearns would set up a sister company to operate as an investment bank.
Marin said Migdal Capital Markets was only an $11 million deal, which was small in terms of the Israeli market, not to mention for Bear Stearns. "You have to start with the foundations, and Migdal Capital Markets will be the foundation of our activity in Israel. We have plans to expand through in-house growth, but mainly by acquisitions. We also plan to introduce new financial products to the Israeli capital market, from hedge funds to exchange-traded funds (ETFs)."
"Globes": Do you plan to buy provident funds when the banks sell them?
"We'll buy aggressively. We won't wait for the Bachar reforms. It's quite possible that we'll buy mutual and provident funds much earlier."
Published by Globes [online], Israel business news - www.globes.co.il - on March 24, 2005