The Bank of Israel will not allow Bank Leumi (TASE: LUMI) to own 20% of the shares in Leumi Card after selling the company to investment fund Warburg Pincus. "This acquisition is inconsistent with the spirit of the Increasing Competition in Banking Law. Although it is possible that such a holding would have given the Leumi group a commitment to the success of Leumi Card, the decisive consideration in the Bank of Israel's decision is its wish to ensure fulfillment of the law's purpose of creating separate financial concerns that will not hesitate to become an important competitive factor," the Bank of Israel wrote in its decision.
US fund Warburg Pincus signed an agreement late last week to acquire Leumi Card at a company value of NIS 2.5 billion, reflected a 30% premium on Leumi Card's shareholders' equity. One of the clauses in the agreement gives Leumi Partners an option to buy 20% of Leumi Card at the same value. This restriction complies with the letter of the Increasing Competition in Banking Law (the Strum Law), because under the agreement, Bank Leumi will not have any influence on Leumi Card's actions. Although the clause does not breach the letter of the law, it has aroused criticism, because the purpose of the Strum Law is to separate the large banks from the credit card companies. The main concern is that Leumi Card will not really compete with Bank Leumi if Bank Leumi remains a shareholder in Leumi Card. In any case, this deal is subject to approval from the Bank of Israel, which has now refused to grant it.
Leumi Card chairperson and Leumi Partners CEO Yaron Bloch explained the rationale behind this option clause to "Globes" this week, saying, "…the buyer asked for an association with us. The buyer saw two advantages in this. First of all, it was important for the buyer to have an Israeli partner to help in matters such as financing and regulation, and if Bank Leumi is in the picture, the buyer can rest easy because Bank Leumi will certainly do nothing to harm Leumi Card. This a very strong and correct statement."
Bloch added, "Our willingness to participate in the deal at the price at which the fund is buying proves that we think that the company is going to succeed and that the investor will make a profit on the investment. Leumi Card CEO Ron Fainaro said that this is the best thing for the company. It's wonderful that the main customer is also a partner."
Published by Globes [online], Israel business news - www.globes-online.com - on August 1, 2018
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