How did a New York-based hedge fund get to buy 20% of Tel Aviv Stock Exchange?
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Analysis'How do we know this was the best option?'

How did a New York-based hedge fund get to buy 20% of Tel Aviv Stock Exchange?

Capital market players bemused by process in which Manikay Partners purchased stake in Israel’s stock exchange, after private deliberations, with no tender; ISA yet to approve deal

A broker at the Tel Aviv Stock exchange. (Moshe Shai/Flash90)
A broker at the Tel Aviv Stock exchange. (Moshe Shai/Flash90)

Players in Israel’s capital markets have expressed surprise at the seemingly covert way in which the Tel Aviv Stock Exchange agreed to sell an almost 20 percent stake to New York-based fund Manikay Partners LLC at a valuation of NIS 551 million ($150 million).

The individuals say they are surprised both by the choice of buyer and by how nontransparent the sale process was. The decision to sell to Manikay was made by the board of directors, but the deliberations as to why that offer was chosen over others — if indeed there were others — were not disclosed to the public.

There was also no tender process for the sale, so it is not clear if the exchange got the best deal possible, the players said.

All Israeli citizens, because of their state pensions, have a stake in the country’s only stock exchange.

“I never heard of Manikay and TASE members never received information about how or why they were selected,” said one capital markets player in Israel. “One would think that the TASE would engage a consultant or an international investment bank to get the best price in a process that is transparent and open to the public. Without a tender, how did people even know the bourse was up for sale?”

Illustrative image of the Tel Aviv Stock Exchange, on March 14, 2017. (Roy Alima/Flash90)

The board of directors of the exchange on April 16 approved the sale of stakes to investors including Manikay, the public, and other international investors, a statement published by the TASE said. The sale is part of a push to draw additional investors to the exchange and make it more competitive and efficient, enabling it to become a more dominant player globally and more accessible to the public.

Screen capture from video of Ittai Ben-Zeev, chief executive of the Tel Aviv Stock Exchange. (YouTube)

More than 10 stock exchanges reportedly had expressed an interest, but TASE CEO Ittai Ben-Zeev, who was in charge of the sale, and the board of directors decided it would be better for the exchange to sell a stake to a financial strategic investor than to a foreign stock exchange.

A sale to a foreign stock exchange means the buyer would want exclusivity, which would hamper the ability of Israeli companies to dual-list their shares on other exchanges as they do now, Ben-Zeev explained to attendees of a conference at the exchange on April 25. His comments in Hebrew were posted on the TASE Facebook page.

A foreign exchange might also not have agreed to the conditions of the sale, which required that a chunk of the exchange be kept aside for a future initial public offering (IPO) of shares, he said. In addition, Ben-Zeev said, the TASE realized it could strike up a strategic partnership with a foreign exchange at any time without having to sell it a stake.

As part of the sale process, the existing shareholders of the exchange — both banks and non-banking institutions — agreed to give the TASE CEO a three-month option to sell up to 71.7 percent of their shares to a large foreign exchange, which would become a strategic partner.

The Tel Aviv Stock Exchange (Miriam Alster/FLASH90)

Ben-Zeev had until April 18 to strike a deal with a foreign exchange for the sale of the shares at a TASE valuation of at least NIS 500 million. The exchange was sold for NIS 551 million. Market players are now wondering if a higher sale price could have been obtained had there been a tender process that may have attracted more buyers. Greater proceeds would have benefited the TASE and, indirectly, the Israeli public. Also, they wonder, is Manikay the best strategic partner for the exchange, which is seeking to spruce up its act to attract more listings and investors?

“Last week, a very significant deal was signed for the TASE, and the State of Israel in general,” Ben-Zeev said in a Hebrew Facebook post on April 24 explaining the process to the public. “The deal means that 72 percent out of 100% of the exchange will be transferred to other hands.”

The most important part of the deal, he explained, is that at least 30 percent will be kept aside for when the stock exchange sells its shares in an IPO and the shares will be transferred to the public in half a year, he said. “The exchange, the place in which each Israeli citizen is invested, via his pension, will become a public company.”

People watch a board showing stock fluctuations at the Tel Aviv stock exchange. November, 2007. (photo credit: Moshe Shai/FLASH90)
People watch a board showing stock fluctuations at the Tel Aviv stock exchange. (Moshe Shai/FLASH90)

“When you choose a ‘bridegroom’ you want to know that you chose the best one,” said Yaniv Pagot, an economist and head of strategy for the Ayalon Group, an Israeli institutional investor. “How do we know this was the best option? The exchange should make available to the public how Manikay was chosen.”

Stock exchanges are a way for people to participate in their country’s economy and help firms to raise money from a large pool of investors to boost economic expansion and growth.

Twenty new companies listed on the Tel Aviv Stock Exchange exchange in 2017 and it had a $390 million daily turnover on the equity market, an 18% increase compared to 2016. At the end of 2017 there were 457 companies that had their shares listed on the exchange, up from 451 in 2016, but still well below the 623 listed companies in 2008. The total market capitalization of shares on the exchange was $231 billion at end 2017, according to data provided by the exchange.

A broker at the Tel Aviv Stock Exchange (photo credit: Moshe Shai/Flash90)
A broker at the Tel Aviv Stock Exchange (photo credit: Moshe Shai/Flash90)

Manikay Partners is a hedge fund headquartered in New York.

In a statement announcing its choice, the TASE said that “Manikay has extensive experience and unique expertise in the global exchange industry. It has invested and has been involved in a number of leading exchanges worldwide.”

Manikay was founded by Australians Shane Finemore and Russell Aboud, two former directors of the Australian Securities Exchange (ASX). They resigned from the ASX board in 2013, after the US Securities and Exchange Commission fined Manikay for short-selling shares in Citigroup in 2009, according to The Australian website. Manikay was one of 23 funds that were embroiled in a wide-ranging crackdown by the SEC on short selling, the website said. Finemore and Aboud set up the hedge fund in 2008, and it reportedly manages some AUD2.5 billion ($1.9 billion) in assets.

As part of the Amendment of the Securities Law, which has enabled the restructuring of the TASE to allow for the stake sale, it is prescribed that holding 5% or more in the TASE requires a permit from the Israel Securities Authority. The Israel Securities Authority, which has until June to approve the sale of the TASE stake, declined to comment on the matter.

According to the ISA website, the permit to hold 5% or more of a TASE stake is subject to a number of conditions, including considerations regarding the reliability of the acquiring person or entity, the chance of a possible conflict of interest, and any concerns regarding the correct and fair management of the exchange.

Responses

“The stock exchange’s professional team worked to examine the various alternatives for the sale of the shares, and the process was presented to the board of directors of the exchange as part of the decision-making process,” the TASE said in an emailed comment to the Times of Israel.

“The TASE signed an agreement that envisages there will be no controlling shareholder in the stock exchange and the Israeli public will be a partner in an issue of more than 30% (of shares). The Israeli public should benefit from the success and growth of the Israeli economy. The Tel Aviv Stock Exchange is the most suitable and appropriate platform for the participation of the public, and thus there is nothing more correct than a significant part of the exchange being issued to the general public. We welcome and look forward to cooperating with Manikay, one of the leading investment bodies in the world in the field of exchanges, and we trust it will contribute to the development of the local capital market,” the exchange said in an emailed statement.

In an emailed comment, Manikay said it views “the investment in TASE as long-term strategic partnership with management, and intends to make its knowledge and experience available to management and to provide access to Manikay’s resources, deal flow and network of contacts in the global exchange industry.”

Regarding the SEC fine, Manikay said: “In September 2013, Manikay agreed to settle an SEC inquiry relating to Rule 105 of Regulation M. The SEC inquiry involved 23 firms that allegedly participated in a single secondary offering in December of 2009. Without admitting or denying the SEC’s findings, Manikay consented to disgorge profits ($1.6 million), and pay prejudgment interest and a civil money penalty (about $900K). All but one of the 23 firms have settled similarly. To be noted, after the settlement, in order to avoid any perception matters, Manikay Partners founders Shane Finemore and Russell Aboud decided on their own initiative to step down from the board of directors of the ASX.”

There was no immediate comment from the Finance Ministry.

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