In late August 2021, Rani Zim completed one of the more surprising moves in his meteoric business career when he bought Psagot Investment House for NIS 405 million from Altshuler Shaham.
Before that acquisition, Zim had made his fortune in food retailing, setting up, together with his brother Adi, the Kimat Hinam supermarket chain, which was sold in an impressive exit, and in income producing real estate, with the commercial centers company that bears his name.
But just over two years since the deal that was meant to move him up a league, Group Psagot for Finance and Investments (TASE: GPST), which holds the investment house that was once the biggest in Israel, has a market cap of just NIS 97 million, after a 75% decline in its share price in the past year, and an 80% since the acquisition.
"Rani and Psagot suffered from a lot of bad luck, because sometimes it’s all a matter of timing," a senior capital markets source told "Globes". "Since he bought Psagot, three significant things happened that affected the company. First of all, interest rates rose, and if there’s one thing that a financial marker doesn’t like, it’s interest rate hikes, particularly in the case of a leveraged deal."
To finance the acquisition, Zim took a loan of NIS 255 million from Mizrahi Tefahot Bank, which he offloaded onto the acquired investment house. NIS 120 million is still outstanding.
"A second factor," the source continued, "is the judicial overhaul promoted by the government in the first nine months of the year, which didn’t exactly contribute to the financial markets, with a great deal of money leaving Israel. Psagot doesn’t specialize in long-term savings, in which most of the money is invested outside Israel, but mainly in investment in the local market, in products such as portfolio management, mutual funds, and a little brokerage. These are investment channels that are very vulnerable when Israel takes a hit. Finally, the war that broke out on October 7 was a blow to the finance industry, certainly in the short term."
Now, Group Psagot is setting out to raise NIS 220 million debt, to be secured by the company’s shares in subsidiary Psagot Investment House. To that end, the company’s management has held meetings in the past few days with several financial institutions, to present to them the investment house’s activities and business plans. The sum that Group Psagot seeks to raise is intended both to cover the balance of its debt to Mizrahi Tefahot Bank, and to replace NIS 120 million in marketable bonds due for redemption in the coming eighteen months.
The existing bonds (series C) are currently traded at junk yields of around 16%, which makes it difficult to recycle the debt, hence the collateral required for the bonds to be offered. Group Psagot believes that, once the move is completed, the yield on its bonds will fall to single-digit proportions, and that its share price will rise accordingly.
"A rapid realization that it’s not for him"
So far, Zim has invested nearly NIS 130 million of his own capital in buying control of Psagot, including in a rights issue that the group made last summer. The 62% stake that Zim holds in Group Psagot, the public company (formerly called Value Capital) through which he bought the investment house, is currently worth just NIS 64 million, meaning that he lost about half his investment within a short time.
Immediately after acquiring Psagot’s business (which mainly consisted of management of mutual funds and customer portfolios) Zim told "Globes": "Our headline at Psagot is to restore its former glory. We haven’t come to make a killing in one or two years, and I don’t want to start selling the business on to other entities… we’ll invest in the people, in the activity, in the organization, in the market, and we’ll form collaborations with many entities in the economy. We want to bring new activities and a different aroma to the market."
But, as reported six months ago, Zim has started to look for someone to buy his entire stake in the investment house, or at least part of it. One of the names mentioned in the press is that of Group Psagot CEO Yaniv Bender, who currently holds 7.4% of the company, as someone who could participate in such an acquisition.
Psagot recently completed the sale of one third of its mutual funds business and its entire portfolio management business to Kessem, of The Phoenix Holdings group, for NIS 200 million. The sale of the mutual funds will yield a gain to Psagot of NIS 90 million, which will be posted in it fourth quarter financials. That amount is equivalent to the entire company’s current market cap, which, if you will, means that the rest of its business is valued at zero.
"There’s a considerable difference between commercial centers and the world of finance," a capital market player says. "People think that if they are good managers, they can manage anything, but that isn’t necessarily so. To succeed in the capital market you have to be able to bring in the best investment managers and create DNA in the organization. There are many elements that are not similar to real estate or retailing, and the mere fact that a person has financial insight doesn’t mean success on the capital market. It looks sexy and glittering from the outside, but you have to understand how this sector works."
Psagot’s business has been growing, but it is not managing to translate this into profits. Its mutual funds took in NIS 1.4 billion in October, and NIS 7 billion in the year to the end of October, which means that it has NIS 43 billion under management. Most of the incoming money, however, went into money market funds, a product with negligible management fees and low profits.
Psagot posted a loss of NIS 27 million for the first half of 2023, which is largely attributed to its non-bank credit business, an activity begun before Zim acquired the company. About six weeks ago, Psagot sold control of its main holding in this area, AppliCheck, to its founder, Meny Guy, and now holds 20% of that company.
So what will happen now? When he put Psagot up for sale a few months ago, Zim was looking for a valuation of around NIS 400 million, similar to the valuation at which he acquired it. But in the light of the current share price, and since market conditions in Israel in general indicate that it will be hard to find a buyer who wants to do a deal at this time, it’s not certain that a deal is in the offing. At any rate, Group Psagot recently announced that Rani Zim was stepping down as chairperson, to be replaced by Daniel Leventhal.
Published by Globes, Israel business news - en.globes.co.il - on November 5, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.