Why TASE decided not to sell itself to a foreign exchange — the CEO explains

Why TASE decided not to sell itself to a foreign exchange — the CEO explains

In April, in a change of course, Israel’s stock exchange approved the sale of stakes to 5 foreign investors, including a nearly 20% stake to New York-based fund Manikay Partners

The CEO of the Tel Aviv Stock Exchange (TASE) Ittai Ben-Zeev speaking to journalists in Tel Aviv; Sept. 3, 2018 (Shoshanna Solomon/Times of Israel)
The CEO of the Tel Aviv Stock Exchange (TASE) Ittai Ben-Zeev speaking to journalists in Tel Aviv; Sept. 3, 2018 (Shoshanna Solomon/Times of Israel)

Tel Aviv Stock Exchange CEO Ittai Ben-Zeev in an interview on Monday explained TASE’s decision to change tack and opt to sell a minority stake to international investors — rather than sell control to a foreign stock exchange — as due to a combination of factors: state regulatory constraints, a requirement for a speedy initial public offering of shares, and the desire to continue to allow Israeli companies to dual-list stock on exchanges of their choice.

In April, the board of the TASE approved the sale of stakes to five foreign investors, including a nearly 20 percent stake to New York-based fund Manikay Partners LLC,  as part of a push to restructure the exchange, to draw additional investors, and make it more competitive and efficient, enabling it to become a more dominant player globally and more accessible to the public.

As part of its strategy, the TASE will also hold an IPO of at least a 31.7% stake at a valuation of at least NIS 551 million ($153 million), scheduled to take place before the end of the year.

Following the sale to Manikay and the other investors, which last month got the green light from the Israel Securities Authority, players in Israel’s capital markets expressed surprise at the seemingly covert moves.

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

In an interview with The Times of Israel, Ben-Zeev sought to set the record straight.

The CEO of the Tel Aviv Stock Exchange (TASE) Ittai Ben-Zeev speaking to journalists in Tel Aviv; Sept. 3, 2018 (Shoshanna Solomon/Times of Israel)

He explained said that initially the TASE had turned to “several worldwide exchanges” to interest them in a stake in the bourse, and had signed nondisclosure agreements with 10 exchanges, some of which submitted indicative prices for a possible acquisition.

However the process was not “seamless,” he said, and as time proceeded,  management realized there were obstacles in its path.

These included the fact that the law governing the TASE stipulates that even if an entity buys a controlling stake, it cannot control the exchange via its board of directors, and the majority of the directors must be independent.

Furthermore, any exchange that would buy a majority stake would want to make sure that any dual listings of held by Israeli companies would be held on their own exchange, and that would curb the freedom of such firms to list on exchanges of their choice.

Thirdly, the IPO, seen as a key component of TASE’s strategy and planned to be held soon after a sale of the exchange to a strategic investor, was also a hurdle for prospective buyers, since “when you want to buy a controlling stake you don’t want to have an IPO six months,” Ben-Zeev said. “No one wants to dilute their shares” so quickly, he noted.

Given the tight timeline the management was operating in — they had received a three-month option from the current owners of the exchange to arrange a share sale — they decided to switch tacks.

Illustrative: A board showing stock fluctuations at the Tel Aviv stock exchange (Moshe Shai/FLASH90)

“We came to the conclusion together with our board of directors that it would not be wise for us to continue doing the transaction with one of the exchanges,” Ben-Zeev said. “We explained it to all of the exchanges, we spoke with them and we maintain a very good relationship with all of them.”

Thus, TASE management decided the best move would be to sell minority stakes of the exchange to foreign investors rather than control to a foreign stock exchange.

Ben-Zeev said that while TASE had been in talks with foreign stock exchanges, management was contacted by an number of international investors who expressed an interest in acquiring stakes. And so, once it changed strategy, it had a number of interested investors already lined up. “It is not like we needed to start looking for international investors,” he said.

Why are foreign investors interested?
“All of them believe in the Israeli economy; all of them think that the current valuation of TASE is well below where it should be if you look at the strength of the economy, the innovation, and the high-tech,” that is happening in Israel. They also thought the steps undertaken by the exchange were going in the right direction, to make the organization more business oriented, he explained.

These investors thought that “this is a good investment for a very long period of time and we want to be in. We had all kinds of people who contacted us who said we want to be part of the deal.”

Won’t the new investors be able to sell their stakes right after the IPO? And if they do, who will remain as TASE’s strategic partner to bring about the change it was seeking?

The accord with the foreign investors stipulates that the IPO will be held at a valuation no less than NIS 551 million, and if there is any upside to the price, then the TASE and the investors will jointly benefit from any added value — with each side getting 50% of the extra, Ben-Zeev explained in a press conference Monday.

After the offering, Manikay will hold 19.99% of the exchange, current TASE members will hold up to 22.3%, and the four other foreign funds will own 4.99% each. Employees of the exchange will own a 6% stake.

Manikay will be able to sell its stake after one year, Ben Zeev said, while the other foreign partners — Sunsuper PTY Ltd, Moelis Australia Asset Management Ltd, Dalton Investments LLC and Novo Nordisk Foundation, who will own 4.99 percent each — will be able to sell their stakes immediately after the IPO.

At the time of the announcement of the accord to sell to Manikay, Ben-Zeev said in a statement that the entry of international investment groups would support the continued development and growth of the TASE.

But on Monday, Ben-Zeev said that the improvement of the TASE “is not Manikay’s job, it is my job, the management’s job.”

“We saw that Manikay has a lot of expertise and they know a lot of brokers and a lot of remote members in other exchanges. Their interest is not on one specific exchange.”

But he was sanguine about the company staying with the TASE.

“I don’t see any scenario in which Manikay sells — not in one year, not in two years, and not in four years. Because you don’t (go through) the whole process and get the approval of the ISA to sell your shares after one or two years. I don’t see that happening,” he said.

“Also the (other) foreign investors don’t want to sell their shares. All of the five are here for many years. You don’t go in a country like Israel with the ISA, with all the approval, for six months.”

He acknowledged that in theory, they could sell: “It is a free world, of course. But it is not their intention.”

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