Why prosperous kibbutz industry shuns the stock market

Kibbutz company exits  credit; Tali Bogdanovsky
Kibbutz company exits credit; Tali Bogdanovsky

Some listed kibbutz companies give excellent returns, but there have been no new flotations for a decade, as kibbutz members turn to private equity instead.

Analysis by business information company Coface BDI for 2021 found that the revenue of kibbutz industry surpassed NIS 50 billion that year, and was 4.6% higher than in the previous year. Revenue per worker in this sector was estimated at NIS 1.5 million, which compared with an average of NIS 1.2 million for Israeli industry as a whole.

Kibbutz members, however, are not keen on sharing their industrial activity with the public, and instead of dramatic members’ meetings on choosing an underwriter to lead an IPO on the stock exchange, they prefer to sell control of the factory, or to sell outright, to a private equity firm or an overseas competitor.

The result is a long series of exits in recent years, enriching the selling kibbutz by tens, and sometimes hundreds of millions of shekels, turning a few hundred kibbutz members into millionaires, at least on paper.

Why have exits with a fat check replaced flotations on the stock exchange that produce public companies that are generally profitable and growing over many years? An experienced investor who bought kibbutz factories in the past explains: "Within the kibbutz there is a young population and a veteran population. What does the veteran population want? In the end, it wants cash, for example because the daughter has left for Tel Aviv, married, and needs help from her parents," for a car or a home.

On the other hand, the investor says, "The young people on the kibbutz come to me and say that they want us to stay for the long term. A young man in this category explained to me once that he might go to study engineering at the Technion, and then he would want to return to work in the factory. In many cases, as an investor, I find contradictory thinking.

"I have also bought several successful family businesses. The factory is never in their homes. On the kibbutz, it’s different. So as an investor, when I come to a company that belongs to a kibbutz, I explain that I’m not looking for my own benefit, but first of all for a way of structuring the factory better, and then I’ll also come out ahead."

Adv. Arnon Mainfeld, head of the securities and capital markets department at the law firm of S. Friedman Abramson & Co., which deals with many kibbutz companies, says, "The capital market has underpriced these companies for years, despite that fact that they are stable companies and not leveraged, with significant liquid assets, and oriented to overseas activity.

"These are also companies that distribute regular dividends. Instead of perceiving the steady activity of these companies as an advantage, the market sees it as a disadvantage."

At present, only nine kibbutz companies are traded on the Tel Aviv Stock Exchange (not including Meshek Energy (TASE: MSKE), which is held by an association of all the kibbutzim). These are generally growing, export-oriented industrial companies, and four of them have market caps in excess of NIS 1 billion.

The outstanding company for returns in recent years has been Palram (TASE: PLRM), the maker of thermoplastic panels from Kibbutz Ramat Yohanan. Its share price has shot up 70% in the past three years, to give it a current market cap of NIS 1.3 billion.

Another standout is Gan Shmuel (TASE: GSFI), controlled by the kibbutz of the same name, which produces juices and other products from fruit and vegetables. Its share price has risen 52% in the past three years, giving it a current market cap of NIS 446 million.

The kibbutz company with the lowest return is Maytronics (TASE: MTRN), the manufacturer of swimming pool cleaning robots from Kibbutz Yizre’el. A downturn in its business has led to a 72% slide in its share price in the past three years.

The share price of Raval (TASE: RVL), which produces fuel tank ventilating systems for the automotive industry and is located at Kibbutz Revivim, has fallen by a similar percentage over the same period.

And while kibbutz enterprise has been floated on the stock exchange for over a decade, the list of exits, that is, the sale of all or part of the holding of the kibbutz in its industrial enterprise, is very long.

Kibbutz Gazit, for example, sold Plazit-Polygal Plastics Industries, which produces plastic panels, to US company Plaskolite for $210 million, a few weeks after selling, together with Kibbutz Hama’apil, MCP Performance Plastic, which produces plastic trays for the food industry, to Danish food packaging company Faerch, at a valuation of NIS 229 million.

Kibbutz Metzer sold the pipes division of drip irrigation equipment company Metzerplas (now known as Metzer) to Inrom Construction Industries (TASE: INRM) for NIS 150 million; Kibbutz Ha’ogen’s Haogenplast, a developer of PVC products, was sold to German company Kap for NIS 105 million; Kibbutz Yehiam sold control of its sausage and cured and smoked meats factory Maadanei Yehiam to the Green Lantern fund for NIS 80 million; and Kibbutz Shamir sold its remaining 50% stake in Shamir Optical Industry to Essilor Luxottica for about $500 million.

A source closely familiar with kibbutz industry told "Globes" in the past that the sales of kibbutz enterprises could not be seen in isolation from the process of privatization that the kibbutz collective model had undergone. "As the kibbutz entered into the process of privatization more deeply, the question always arose of the sources for supporting the community over time - was it right that a community of a thousand people was reliant upon a single business? That drove a process in which the kibbutzim parted from their holdings, and diverted resources to new businesses, or to the benefit of their members. I see that phenomenon continuing."

There is also another reason for the kibbutzim to avoid the capital market: the huge sums that the enterprise transfers to the owners, the kibbutz, annually, and that are approved by the shareholders. Two weeks ago, Palram, of Kibbutz Ramat Yohanan, summoned a shareholders meeting to approve an agreement for the provision of services by the kibbutz (such as carpentry, vehicle maintenance, groceries, laundry, photography and film production) and of course the salaries of the workers that the kibbutz assigned to work in the factory. The reported cost of this agreement was almost NIS 60 million.

In 2018, Tsahi Avraham’s hedge fund Reading Capital fumed at a similar agreement brought before the shareholders. Avraham told "Globes" at the time, "It seems that Kibbutz Ramat Yohanan has not understood the need to behave in a more suitable fashion towards the minority shareholders and to share profits with them. If the kibbutz wants to take all the company’s profits for itself, it should do the right thing and file an offer to purchase, and delist the company from trading."

Adv. Mainfeld believes that the capital market is missing the general picture. "These companies buy services from the kibbutz, which is the controlling shareholders, under long-term agreements. These are amazing agreements as far as the company is concerned, because this way it has veteran employees with experience and expertise, a very strong connection to the company, and high motivation. But when the companies seek approval for these agreements, the capital market starts to ask questions, and often raises difficulties.."

A manager from a kibbutz who grew up on it and today specializes in the management of kibbutz companies says that these frictions created resentment over the years, and that this gradually led to some kibbutzim avoiding the idea of a flotation and preferring to bring in privately-held funds to invest in the enterprise. "The encounter with the capital market is a kind of trauma for the management of the kibbutz companies, chiefly in relation to the sale of services by the kibbutz to the enterprise," he says.

"For example, if there’s a kibbutz carpentry shop that makes pallets for the factory’s products, before the flotation there is no question about ordering the pallets from the kibbutz. After the flotation, the kibbutz company finds itself having to speak a different language. It has to obtain approval from an external entity like a shareholders’ meeting. It’s a culture clash.

"Over the years, the kibbutzim grew to understand the what the capital market meant and how cumbersome it could be, and that’s even before considering the costs of maintaining a public company. So it became more comfortable for them to approach privately-held entities. The private funds are often experienced investors who come into the kibbutz and learn to take account of its needs."

So the privately-held investment fund come with a check in hand, which the kibbutz members yearn for so that they will have something to give their children, and also with a promise to settle the agreements between the enterprise and the kibbutz discreetly, without other vociferous shareholders who would be liable to thwart such a move. The capital market finds it hard to comprehend just how much the enterprise sees itself as part of the kibbutz, even when it is partly sold off.

Neri Nehorai, CEO of Plastopil Hazorea, at Kibbutz Hazorea, which develops and manufactures packaging for the chilled food industry, says, "The kibbutz companies always sought to innovate and invest, not necessarily on the basis of ‘return on investment’. They were always interested in being creative, and they have their own language. I was in a company that was known for years for its innovation and groundbreaking ideas, and to this day I see how purposeful these companies are and the quantity of new products that they come up with.

"The kibbutz company has undergone a process of financial strengthening. The industry, which underwent difficulties in 1984-1985, got back on its feet, and set up good, strong, economically sound enterprises. The process of maturation continued in the last decade as well, when the companies turned for investment to privately-held funds."

What is the capital market missing?

"The degree to which the sense of ownership of the kibbutz companies is important. I’m amazed anew every time at the strength of the commitment. In our factories in the south, in Sderot and other places, there’s shooting all around and smoke from fires, but the workers do everything they can to get to work.

"I have a logistics manager from Kibbutz Nirim. He went back and slept at the kibbutz, almost alone, and every morning he got up and went to the factory so that the goods would be shipped out. These are people who feel that it’s their home in every sense."

Published by Globes, Israel business news - en.globes.co.il - on June 17, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Kibbutz company exits  credit; Tali Bogdanovsky
Kibbutz company exits credit; Tali Bogdanovsky
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