The proposed NIS 2.5 billion sale of Israeli credit card company Leumi Card is arousing controversy within the Bank of Israel, putting the fate of the deal into doubt.
The bidder, US fund Warburg Pincus, has already passed the reliability test, and Supervisor of Bank Dr. Hedva Ber favors approval of the deal. Bank of Israel director of legal division Adv. Tida Shamir, however, believes that the current financing structure for the deal should not be approved, and the parties slated to finance the deal - Harel Insurance Investments and Financial Services Ltd. (TASE: HARL), Menorah Mivtachim Holdings Ltd. (TASE: MORA), and The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5) - should therefore either change the collateral and covenants for the credit that they are providing to the US fund or be considered controlling shareholders in Leumi Card, which would thwart the deal.
As far as is known, the problem concerns the special purpose vehicle (SPV) that Warburg Pincus plans to set up for the acquisition of Leumi Card. Under the plan, the SPV will receive a NIS 900 million loan from Harel, Menorah, and Phoenix, while these concerns will receive, among other things, collateral in the form of a lien on 80% of the shares in the SPV, which will control the credit card company. The SPV will undertake to refrain from taking additional loans or contracting additional liens.
As far as is known, Shamir is demanding that the three financing concerns be approved now as controlling shareholders in Leumi Card, in case this lien will be foreclosed. The three concerns are willing to establish a trustee mechanism for Leumi Card, and believe that there is no need for them to be approved in advance as controlling shareholders in Leumi Card as if they will hold the company directly if the lien is foreclosed. They are unwilling to forego the collateral and covenants for the deal.
The Governor will decide
Bank of Israel sources pooh-poohed the idea that it was talking out of both sides of its mouth. They say that the deal has both economic aspects for which the Supervisor of Bank is responsible and legal aspects for which the legal division director is responsible. The sources added that in the end, Governor of the Bank of Israel Prof. Amir Yaron would decide the matter.
The Bank of Israel stated in response, "The Bank of Israel is making extraordinary efforts in coordination with the Capital Markets, Insurance, and Savings Authority, to enable the transaction to go through for the sake of the goals of the reform, while meeting all of the legal and regulatory requirements. Late last week, the Supervisor of Banks proposed a number of formulae that would enable the Governor to grant a permit and conclude the transaction."
It appears that the Bank of Israel Banking Supervision Department is not alone in advocating approval of the deal as is; the Capital Markets, Insurance, and Savings Authority also believes that the covenants agreed by Warburg Pincus and the financing concerns do not constitute effective control of Leumi Card. In any case, Warburg Pincus is declaring that it is prepared to complete the deal and is waiting to obtain the relevant approvals. It is likely that the deal, for which the approval period has already been extended once, will not be completed by this Thursday, because even if approval is obtained from the Bank of Israel, it will take several more working days to adapt all of the relevant agreements.
Sources also said that all of the relevant parties in the deal and its financing, plus the Bank of Israel and the Governor, were conducting intensive marathon talks to find an agreed solution. The deal is an important one; should it fail, it will do great damage to Bank Leumi (TASE: LUMI), Warburg Pincus, and the political and regulatory systems that promoted and passed the Promotion of Competition and Reduction of Concentration Law and the reform in the credit cards market. As of now, the deadline for completing the deal agreed on by Bank Leumi and the fund, which was recently extended for two weeks, is this Thursday. It is unclear whether approval from the Bank of Israel will be forthcoming during the coming week.
The sale of Leumi Card by Bank Leumi (80%) and Azrieli Group Ltd. (TASE: AZRG) (20%) to Warburg Pincus for NIS 2.5 billion was signed seven months ago. The stipulated date for completing the deal, January 31, 2019, passed without the deal being approved, and the deadline was accordingly extended.
Leumi Card plans to distribute a NIS 600 million dividend before the deal is completed, when Bank Leumi and Azrieli are still the owners. If this dividend is paid, it will be deducted from the value of the deal, so that the US fund will have to pay NIS 1.9 billion to complete the deal. Warburg Pincus will pay this with a NIS 900 million loan from Harel, Menorah, and Phoenix, plus NIS 1 billion in equity.
The Promotion of Competition and Reduction of Concentration Law also requires Bank Hapoalim (TASE: POLI) to sell Isracard, which also includes the local branch of the American Express company. In contrast to Leumi Card and Isracard, the ICC-Cal, the third largest credit card company, controlled by Israel Discount Bank (TASE: DSCT), will not be sold.
Bank Hapoalim is obligated to sell Isracard this year. As far as is known, Bank Hapoalim is preparing to offer the company's shares on the stock exchange, and has already begun promoting an offering. Isracard has large untaxable profits, because the company has not distributed a dividend for years. Isracard is therefore likely to distribute up to NIS 1.4 billion in surplus capital as a dividend, which will reduce its shareholders' equity to NIS 2.2 billion. If and when this occurs, it will affect Isracard's value by reducing the equity used in calculating the multiple to be agreed between the sellers and the buyers. It is believed that given the premium set in the Leumi Card deal, Isracard's value will probably be put at NIS 2.5-3 billion, depending on the premium that its owners and the underwriters manage to obtain.
Furthermore, as far as is known, the talks for the sale of Isracard to a third party in a strategic deal have been taking treading water, and may be fading, while the option of an offering appears extremely likely. The matter is still in internal discussions and preliminary preparations. Where the bank is concerned, the option of an offering will give it another year to sell its holdings in Israel's largest credit card company.
Published by Globes, Israel business news - en.globes.co.il - on February 11, 2019
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