The state will allow IDB Development Corporation to dismantle one level of its pyramid structure by means of a sale of Discount Investment Corporation (TASE: DISI) through a seller's loan, Minister of Justice Ayelet Shaked has decided. This involves a loophole in the law allowing the dismantling of a pyramid structure through a sale to a fellow subsidiary of the company that controls it.
Shaked's decision puts an end to the prolonged discussions and indecision in the Ministry of Justice and the Israel Securities Authority, while Shaked herself initially preferred to eliminate the loophole allowing IDB Development to carry out this maneuver. In a discussion held only a month ago, Shaked ordered the Ministry of Justice to publish regulations under the Promotion of Competition and Reduction of Concentration Law that would close the loophole, after officials in the Ministry of Justice warned that allowing IDB Development's maneuver would set a precedent that would result in the bypassing of the law, and that other business groups could not be prevented from doing the same thing in the future.
In response to a question today from "Globes," the Ministry of Justice stated, "Following a number of meetings on the subject, and after the various alternatives were presented by the professional echelon, the minister of justice accepted the Securities Authority's view that this was not the right time to revise the law and close the loophole, among other things because of the supreme importance of maintaining regulatory stability, and that it would not be proper to change the rules in midstream without providing adequate advance notice. At the same time, the minister of justice made it clear that should other companies follow this path, a legislative amendment closing the loophole will definitely be considered."
The background to IDB Development's measure is the Promotion of Competition and Reduction of Concentration Law, which states that the pyramid structure of companies whose shares or bonds are listed for trading in Israel must reduce that pyramid to no more than three levels by December 2017, and to no more than two levels by December 2019. The IDB Development pyramid currently has four levels. At the top of the pyramid is IDB Development, whose bonds are listed on the Tel Aviv Stock Exchange (TASE), but whose shares are not. Under it is Discount Investment which holds Property and Building Ltd. (TASE: PTBL), which in turn owns Bayside Land Corp. Ltd.(Gav Yam) (TASE: BYSD1), Ispro - The Israel Properties Rental Corp. Ltd. (TASE: IPRO), and Mehadrin Tnuport Export LP (TASE:MEDH).
Several weeks ago, IDB Development notified the Securities Authority that it was unable to reduce the number of levels as required by the law by December 31 in the normal ways, and that the only way of doing so in compliance with the deadline was by IDB selling its shares in Discount Investment to a new SPV that would be a private company controlled by IDB controlling shareholder Eduardo Elsztain. In this way, IDB would exit the group's pyramid, and would be replaced by Discount Investment as the top level. The private company is to receive the money for acquiring Discount Investment from IDB itself as a seller's loan (which IDB is to raise in a bond issue).
This plan is being opposed because the entry of the private company is being financed by a company that has issued bonds to the public, leaving unchanged the structure that the Promotion of Competition and Reduction of Concentration Law was designed to prevent, with a single controlling shareholder using public money to preserve control of the pyramid. The effect will be five levels, instead of four.
IDB initially proposed abandoning its plan for the acquisition of Discount Investment by an SPV in exchange for the extension of the deadline for eliminating a level through more acceptable means past December 31. This would require the passing of Knesset legislation of both regulations to close the loophole and extension of the legal deadline. It is feared that if IDB does not meet the deadline, shares of companies in the group's fourth level - Israel Properties Rental, Bayside, and Mehadrin - will be arbitrarily transferred to a trustee. Perach Lerner, recently appointed VP business regulation in the IDB group, who has solid political connections, handled the group's negotiations with the state. At the same time, there are still open legal questions concerning the propriety of the deal, which the IDB board of directors has approved in principle, but has not yet signed. Market sources believe that if a deal is signed, IDB's creditors are likely to file a court petition against it. The relevant creditors are the trustees for the Series 9 bonds, Hermetic Trust Services, and its joint CEO, Merav Offer Oren, who are represented by Advocate Guy Gissin.
Published by Globes [online], Israel Business News - www.globes-online.com - on August 24, 2017
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