"The sale of Leumi Card is the most difficult and complicated one I have ever led. There were many different aspects and a lot of things that had to be settled," said Leumi Card chairperson and Leumi Partners CEO Yaron Bloch. Bloch spearheaded the sale of Leumi Card to US investment fund Warburg Pincus at a company value of NIS 2.5 billion. "Warburg Pincus, one of the world's largest funds, decided to invest in a local company," Bloch says. "This is not a sale of a company like Mobileye which operates all over the world; it's a company that is active only in the domestic market and under heavy regulation, but a serious international fund bought it nevertheless. I was surprised at the number of concerns interested. I thought we would have trouble getting investors interested in a company operating under such tough regulation that is active exclusively in the local market."
"Globes": You managed to sell Leumi Card at a value 30% higher than its shareholders' equity. Are you satisfied with the price?
Bloch: "All in all, we're satisfied. A good deal in a competitive process took place here, which ended positively as far as we're concerned in both the price and the identity of the buyer. The price we got was in line with the expectations I talked about last year."
The agreement states that Leumi Partners has an option to buy 20% of Leumi Card. Doesn't this clause evade the Increasing Competition in Banking Law (the Strum Law), which aimed to separate the large banks from the credit card companies?
"We always consider the feasibility of every move. We examined the feasibility of this clause with some of Israel's best lawyers. Legally, we're on solid ground and there shouldn't be any problem. The question is what will actually happen and the Supervisor of Banks will have to decide this. We're planning on submitting the request and hope that she will approve it."
Even if the clause conforms to the letter of the law, can you understand the criticism aroused by such a measure?
"There are facts beyond demagoguery and it is important to understand them, too. When we dealt with various buyers, their great concern was the relationship with the bank after the separation, because everyone realizes that there is dependency here. Everyone who looked at the buying opportunity wanted to make sure that the company would remain strong.
"We dealt with this concern in a number of ways. In the operating agreement (the agreement arranging relations between Bank Leumi and Leumi Card, I.A.), Bank Leumi made significant concessions for the benefit of the company in order to strengthen it. The company will receive up to NIS 273 million more if it meets various targets.
"In addition, 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, it will certainly do nothing to harm Leumi Card. This a very strong and correct statement.
"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."
But that is exactly the problem. Leumi Card is supposed to be a competitor of Bank Leumi, not its partner.
"There is no problem about it competing with Bank Leumi and that is what will happen. The market is very large and there is room for more players. Keep in mind that Leumi Partners also owns 20% of Direct Insurance - Financial Investments and the company is successful. This concern competes with Bank Leumi in credit, and do you think there was some kind of influence? Look at the results and tell me whether Bank Leumi had a bad influence. In this case, we don't even directly hold the company; we will be limited partners above. We're willing to concede our minority rights and be partners only in the results. If Leumi Partners owns 20% of Leumi Card, it will only be good for the company and the public. As a bank and a public company, we'll make sure that the company is run fairly and well."
You are very optimistic about the day after, but there is concern that since the fund has acquired control, it will raise its interest rate and commissions in order to improve its investment. Do you think we will see a scenario like this?
"We're familiar with the global private equity field and investors in funds in Israel and overseas. The world has changed. In the past, most of the assets were controlled by large families with an enormous portfolio. Today, the main large controlling shareholders are private equity funds. This is the case everywhere in the world and even more so in Israel.
"When good concerns like Warburg Pincus make investments, they aren't coming to raise prices and cut expenses. Were that the idea, entering would not interest them. Their mandate is to take a company from X to Y, and yes, to make it more efficient to in order to be sharp, but also in large and diverse value offers, to develop new growth engines, and to take advantage of opportunities created by regulatory changes."
But in the end, these funds are coming for a short time and want to increase value quickly.
"That’s good. Someone buying for 20 years feels no urgency and will improve things slowly. When a fund enters such an event, it starts working and has a period of 5-6 years. It comes to do good business from the first day.
"Warburg Pincus regards the Israeli credit market as a huge opportunity because it is technologically advanced, but features a lot of concentration in the banking sector."
Do you think that Leumi Card will become a bank, as the Ministry of Finance would like to see?
"It depends on the new owners. As far as I know, they have no such intention in the near future. They want to expand the existing engines, but they may consider it in the future."
Above it all
The process of selling Leumi Card caused tension and a built-in conflict of interest between Bank Leumi (TASE: LUMI) and the credit card company it owns, which is supposed to become its competitor. This created friction between the parties, with Bloch serving as a mediator in various matters, being chairperson of Leumi Card on the one hand and CEO of another Bank Leumi subsidiary on the other. He led the sale together with Bank Leumi strategy and regulation division head Hanan Friedman.
How did you get along with the conflicts of interest and friction around you?
"Not all conflicts of interest are the same. I was in a conflict of interest, but the fact that I was from above put me in the most correct place. I looked at things in the most correct and fairest way and as chairperson of Leumi Card, I had the responsibility to do the best. I think that the result of the deal proves this - both the operating agreement we reached and the buyer, who I believe will take the company forward. Everything worked out in the end."
They say that Warburg Pincus was impressed by you. Will you remain chairperson of Leumi Card after it is separated from Bank Leumi?
"This isn't on the agenda. I like what I'm doing at Leumi Partners and the platform I have there. I'm very satisfied with where I am."
"We gave Partner every chance"
The signing of the agreement between Bank Leumi and Warburg Pincus, which took place late last week, was considered rather surprising. The reason is that Bank Leumi allowed binding bids to acquire Leumi Card to be submitted up until August 2, but nevertheless signed a deal with Warburg Pincus before that date, thereby creating bitterness among some of the other bidders.
Bloch rejects the complaints and talks about the process: "At the beginning, we worked with 17 concerns in Israel and overseas in the acquisition. Throughout the process, which took several months, we gradually cut down the number of bidders. Some withdrew voluntarily and we chose not to continue with some others. We eventually reached the final stage with six concerns and at the end of the process were left with three concerns (Warburg Pincus, Centerbridge Partners, and Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), I.A.), each of which was very serious in the process and devoted great efforts to assessing the deal.
"We gave Partner every chance by letting them join the process only in the final months. Although they joined late, they received full support. We eventually decided on one of them. You can't say that we signed too quickly; it wasn't a process that began two days before."
But why didn't you wait until the deadline you set? You might have gotten better offers.
"Even before the final stages, we told them and also wrote that August 2 was not written in stone - that if candidates reached a decision about the structure of the deal that would be right for us and would meet our targets, we would be willing to close a deal before that. Just continuing the process for no reason would have been irresponsible."
Centerbridge also offered about the same price as Warburg Pincus. Why did you choose Warburg Pincus in the end?
"Both concerns suited us and we hesitated. The main consideration was the price offered, but it wasn't the only one. The identity of the buyer was important to us. We're not selling real estate that you irrevocably get rid of. This company will be connected to Bank Leumi for a long time. It gets information about Bank Leumi's customers. It will be an important service provider and Bank Leumi will continue supporting the company at the financing level. Bank Leumi wants the good of the company and understands the future partnership, so it was important to find a buyer that would match our expectations. In the end, we reached the conclusion that this is the best concern we could bring to this process. They did work with Leumi Card over the years and we decided that they would suit us in the future for the benefit of the company and its customers."
Published by Globes [online], Israel business news - www.globes-online.com - on July 31, 2018
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