Experts: PM’s trust-busting may create bargains for investors

New rules passed to break up large conglomerates of Israeli companies may end up flooding the country with bargain-hunting foreign investors, experts say.

The new financial standards aim to end the dominance of a number of tycoons in the Israeli economy, who will no longer be allowed to own both financing arms and real assets.

By forcing companies to sell or spin off subsidiaries, the government hoped to free up credit in the economy and eventually lead to lower prices for housing, food, transportation, and other basics. But the biggest benefactors, say experts, may be stock market investors who will have the opportunity to get stakes in some of Israel’s most successful companies.

The recommendations were the culmination of several years of work by a commission  headed by former Finance Ministry director general Haim Shani.

The Shani Commission made its final recommendations last month, and the cabinet approved them at the end of April. Now, MKs and ministers will develop legislation based on those recommendations, to eventually become law after they wend their way through the Knesset. Of course, the tycoons — to use the term adopted by the Hebrew-language media to describe these oligarchs — are likely to have considerable political influence, so it’s not clear just how hard-hitting the legislation that will eventually pass will be.

Nevertheless, given the current public mood of social protest, in which Israel’s 99% have taken to the streets to protest against the high price of cottage cheese, apartments, transportation, and other necessities, it’s likely that some change will take place. Experts say it’s likely that some of the oligarchs will start spinning off companies sooner rather than later, to avoid being forced into a corner with a deadline to sell.

Among the major issues identified by the Shani Commission is the power that Israel’s financial elite — people like Shari Arison and Yitzchak Tshuva — wield over the financial sector. For example, Tshuva’s Delek Group Ltd. owns the Phoenix Insurance Company, and Arison owns a large interest in Bank Hapoalim. They, along with other tycoons, like Nochi Dankner, who controls IDB holdings, which controls Clal Finance — are able to set the terms for loans and credit for other parts of their empires, ensuring that they have access to cheap money, which lets them buy shares in other companies, allowing them to eventually control even more of the economy.

It was by buying parts of corporate Israel that the tycoons got to be so powerful, the commission said. Although this was not illegal and these individuals and their holding companies did not necessarily set out to control the economy, for the good of the country these empires must be disbanded. The commission recommends giving the tycoons a choice: selling off either the real assets that they own, such as the oil refineries, supermarkets, newspapers, real estate developers, and so on, or divesting themselves of their financial holdings, including banks and insurance companies. Doing so will even out the credit imbalance, which gives the tycoons access to cheap credit, making it more expensive for nearly all other Israelis.

Either way it’s likely that at least some of the companies controlled by the large holding companies will be coming to market soon, and that could present an opportunity for investors who in the past may not have been motivated to invest in Israel, said seasoned investor Mike Gottlieb. “If they find they need to start divesting, the tycoons will probably want to concentrate on their core businesses,” said Gottlieb, who has had a long career as a trader for some of Wall Street’s biggest firms. “But there are other investors who will be interested in the companies they are spinning off, primarily investing in the sectors that those spun-off companies belong to. That could interest investors who previously had not seen anything worthwhile for them in Israel.”

Not only that, Gottlieb told The Times of Israel. “A reasonable argument could be made that the entire process could increase the valuations on the Tel Aviv Stock Exchange, if that is where many of these companies are traded, and the Israeli economy in general,” he said. An influx of cash from investors could push bids up on some of the companies that will be going on sale, depending on circumstances and pricing. “I imagine that this will be a real boon for financial planners and investment advisers, whom many of the retail and institutional investors are going to be looking at for information on just how much these assets are really worth.”

According to Business Week, companies like the Clal and Phoenix insurance companies are trading significantly below market value because they are controlled by the tycoons. As many as 12% of the top TASE companies have assets to put up for sale, and savvy investors may be able to snap up some bargains in Israel, the magazine reported.

And that some companies will be going on sale is almost a sure thing, said Gottlieb. “If there’s a train coming at you, you jump out of the way.” That the government is going to do something is pretty clear, and it’s likely that the big holding companies will not want to wait until they are given a deadline to comply; they would probably prefer to spin off assets on their own terms. “Even so, caution is needed,” said Gottlieb. “Retail investors especially can get suckered if they don’t know what they’re doing.” With that, Israel’s economy is set to be going through some major changes soon, and savvy investors should start doing their homework early, so as not to miss out.