Corporate Sell-Off Looms As Israel Takes on Tycoons

Israeli conglomerates will offload billions of dollars worth of assets over the next few years to comply with a new law designed to promote competition and dilute the power of big business in a country where a handful of tycoons control much of the economy.

The move to redefine Israel’s corporate landscape comes after 400,000 people took to the streets in 2011, the largest protest in Israeli history, angered by the high cost of living.

The Business Concentration Law, which aims to break up some of the largest conglomerates and prevent the growth of new behemoths, could put about 40 firms worth 80-100 billion shekels ($23-28 billion) up for sale, according to Israeli corporate law firm Gross Kleinhendler Hodak Halevy Greenberg & Co (GKH).

The reform, which was approved in December and is the latest in a swath of new business regulations, should result in smaller holding companies with less debt, said Alon Glazer, head of research at Leader Capital Markets.

Some fear it could also push Israel’s biggest companies to look elsewhere for growth.

“The regulator is basically saying, ‘We don’t want you to grow [in Israel]; we want people to come from abroad’,” said an investment source who declined to be named.

The expected surge in divestments looks set to cover a wide range of businesses, from insurers and banks to oil refiners and food companies. Some, including Israel’s second-biggest insurer Clal Insurance and leading food company Tnuva, are already up for sale.

Potential buyers include foreign firms as well as private equity funds, possibly teaming up with local partners unable to buy on their own. Critics say the tighter regulatory environment in Israel could deter some investors, however, forcing sellers to lower their prices or float assets piecemeal on the stock market.

The law, which supporters say is an overdue strike against a select band of overmighty tycoons, grants conglomerates four to six years to sell the assets, but experts believe they will act early to avoid last-minute fire sales.

Corporate power in Israel is more closely concentrated than almost anywhere else in the developed world, with the 10 largest groups controlling 41 percent of the $200 billion-plus value of the 495 companies on the Israeli bourse.

Part of the problem has been that the biggest players have been able to build “pyramids” with tiers of holding companies, enabling wealthy individuals to control business empires while owning only a fraction of the equity in any given entity.

“A lot of assets are going to shake loose,” said one senior investment banker.

GKH Chairman David Hodak called the law a “big experiment” to curb private sector power in the economic and political field, adding: “A process of this kind happens in a country once in a very long while or as a result of a deep crisis.”

The case for breaking up the pyramids was helped by the insolvency of IDB Holding, the most layered of Israel’s conglomerates.

IDB Holding, with a market value of 26.8 million shekels, owns IDB Development, which in turn owns 74 percent of holding company Discount Investment Corp, which holds 70 percent of holding company Koor Industries. IDB Development also owns 55 percent of Clal Insurance.

IDB has already agreed to sell a third of Clal to a group led by Chinese businessman Li Haifeng for 1.47 billion shekels and is also in the process of merging Koor and Discount as it moves toward becoming a two-layer pyramid.

This article appeared in print on page 7 of the February 14th, 2014 edition of Hamodia.