It’s hard to argue with anyone who has a sense of déjà vu, as financial assets that in the past were owned by the banks are taken over by the insurance companies. What started with the Bachar reform in 2005, under which the provident funds were separated from the banks and transferred to the insurance companies, continued in 2017 with the Strum committee, which led to the banks being stripped of the credit card companies, and now receives the final seal, with the NIS 2.7 billion cash bid by insurance company Harel (TASE: HARL) for 100% of credit card company Isracard (TASE: ISCD), a bid representing a 30% premium over Isracard’s market price.
The acquisition of Isracard by Harel, if it goes ahead, parallels the deal that is on the point of closure whereby Harel competitor Clal Insurance (TASE: CLIS) is buying Isracard competitor Max at a valuation of NIS 2.47 billion. Until 2019, these two credit card companies were owned by Israel’s big two banks - Isracard by Bank Hapoalim and Max (then called Leumi Card) by Bank Leumi.
The transfer of control of the credit card companies to the insurance companies looks at first sight like the collapse of the recommendations of the Strum committee and of the aim of the law that incorporated them, which was to open up the credit market to competition by divesting the banks of their credit cards.
The credit portfolios of the three credit card companies (which provide credit to individuals and to small businesses) have in fact grown, and totaled NIS 23 billion at the end of the third quarter of 2022, but they still amount to just 5% of the banks’ credit portfolios.
"The entry of a large financial institution into non-bank credit is a positive development," Dror Strum told "Globes" when the acquisition of Max by Clal Insurance was first reported. "An acquisition like this shortens the time required for the financial institutions to compete in this market. Looking at the big picture, as far as concentration of capital is concerned, the financial institutions are an excellent source of competition for the banks. All the pension funds, the provident funds, and the advanced training funds are under the wings of the institutions, and in this sense the use of the capital for non-bank credit is an excellent source."
At the time, Strum’s remarks were in response to the fact that the interest rates charged by the credit card companies are much higher than those charged by the banks. At the end of the third quarter of 2022, even before the two latest interest rate hikes by the Bank of Israel, the credit card companies were already charging their customers double-digit rates.
The insurance companies buying the credit card companies believe that the financial backing they provide will make it possible to reduce interest rates, so that both Isracard and Max will be able to compete with the banks on rates. If that happens, and certainly if prices fall over time, the Strum recommendations for improving competition on credit will have achieved their aims. Nevertheless, it is not certain that the way that this result is achieved will not come back to hit the Israeli public in the form of new concentration in the market.
This is because instead of getting three independent credit card companies offering credit, boosting competition, and attracting the financial institutions to compete with them and the banks for the consumer’s custom, two of them are on the way to being owned by two companies that together manage NIS 640 billion. It is doubtful whether adding credit portfolios containing billion of shekels of consumer loans to this sum is in the spirit of the Strum law.
Will CAL be next in line?
As for the third credit card company, CAL (Israel Credit Cards), within the next few days Minister of Finance Bezalel Smotrich is due to make a final decision on whether it should be separated from Israel Discount Bank, which owns 72% of it (the other 28% being held by First International Bank of Israel). Both the Bank of Israel and the committee set up to examine the issue recommend separation, but even if that is the way the decision goes, the actual process will probably take three to four years.
It could be that one of the remaining insurance companies will try to get its hands on CAL, which market sources say is worth some NIS 3.5 billion, largely thanks to high profits in relation to its rivals, amounting to NIS 270 million in the first nine months of 2022.
The most realistic candidate would be The Phoenix Holdings (TASE: PHOE), control of which is in the process of being acquired by Abu Dhabi Development Holding Co. Just a few days ago, The Phoenix signed a memorandum of understanding for cooperation with Isracard on setting up Phoenix Credit to provide consumer credit, with the operations being managed by Isracard. Now, if the Harel-Isracard deal goes ahead, the collaboration with The Phoenix will probably be cancelled. To acquire CAL, The Phoenix will need a change in legislation, as at present the law does not allow an insurance company to buy a credit card company directly from a bank.
Support for the Clal-Max deal
Comparing the two deals, the acquisition of Max looks the better one. Isracard has more active credit cards issued than Max, 4.4 million versus 2.7 million, but Max makes higher net profits, NIS 183 million in the first nine months of 2022 versus NIS 143 million for Isracard, and its credit portfolio is 40% larger.
Moreover, the operating agreement that Isracard signed with Bank Hapoalim in July covering Isracard credit cards issued by the bank raises its payment to the bank by NIS 200 million annually, and it has even lost its exclusivity on American Express, which will hurt its profits.
Still, profitability can change, particularly in a period of economic slowdown, and Isracard is focusing on growth in credit, and has embarked on a streamlining program to cut costs. In addition, its shareholders’ equity is 75% larger than that of Max, which means that, under the terms of the acquisition deal the capital multiple is far lower.
At any rate, the high price that Harel has assigned to Isracard, the same as the valuation in the credit card company’s flotation in April 2019, provides a following wind for the Clal-Max deal that Clal Insurance’s management is supporting, and tends to undermine the claims of Alrov Properties and Lodgings (TASE: ALRPR), which opposes the deal. Alrov and its controlling shareholder Alfred Akirov hold 15% of Clal Insurance and are attempting to buy control of the company. They argue that the deal for the acquisition of Max is too expensive and as such does not fit in with Clal Insurance’s strategy. They are now likely to be the big losers.
Shareholder opposition
Isracard currently has no controlling core, which should make the acquisition process harder. Harel itself holds 5.5% of the shares in the company, while Meitav holds a similar stake and Clal Insurance holds a larger one. Harel found a way of overcoming the difficulty, and plans a reverse triangular merger.
Dori Nawi, owner of a non-bank credit company that recently bought 5% of Isracard, has given notice that he will oppose the deal with Harel in the shareholders’ vote. Nawi claims that the price that Harel is offering is too low, so that it is possible that the eventual price will be higher than NIS 2.7 billion.
The regulators
When Harel’s bid for Isracard was announced, Ben Hamburger, of the family that controls Harel and vice chairman of the company, said that it had liquid resources of NIS 2 billion and gross debt of under NIS 600 million. The insurance company therefore feels comfortable with the deal, and will try to complete it without having to dilute shareholdings or raise capital on the market.
Harel plans to acquire Isracard through a reverse triangular merger: setting up a subsidiary that will buy Isracard and merge with it. This structure makes it possible to carry out the acquisition with approval by a regular majority of the shareholders.
Apart from approval by the shareholders and the board of directors, the deal will need to be approved by the regulators. Among other things, a license for holding a clearer will have to be obtained from the Bank of Israel. Approval will be required from the Competition Authority, but no problems are expected from that quarter.
Published by Globes, Israel business news - en.globes.co.il - on January 10, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.