Bank Leumi must sell stake in either Paz or Israel Corporation

Bank Leumi (TASE: LUMI)  has to sell its holdings in either The Israel Corporation (TASE: ILD)  or Paz Oil by the year 2009, the Bank of Israel says.

Israeli banks may own holdings in only one conglomerate, and Paz was officially recognized as just that.

Leumi owns 15.6% of Paz, a holding worth NIS 700 million. It also owns 18.1% of The Israel Corporation, worth NIS 4.2 billion. It has until the end of September 2009 to make its choice.

A conglomerate is defined as a real (non-banking) entity with shareholders' equity of at least NIS 1.7 billion, that operates in three or more sectors.

Paz made the grade of definition as a conglomerate based on its first-quarter 2007 financial statement, which showed that its shareholders' equity had passed NIS 1.7 billion. The report was compiled based on new accounting regulations.

Even before Paz published its first-quarter statement, the Bank of Israel and Bank Leumi were discussing the energy company's status.

Leumi argued that Paz is not a conglomerate because "energy" is a single sector. But on Wednesday the Bank of Israel wrote back, rejecting the bank's interpretation.

This is not the first time Bank Leumi has faced this dilemma. Previously it had owned holdings in three declared conglomerates ? The Israel Corporation, Africa Israel (TASE: AFIL)  and Migdal Insurance (TASE: MGDL). In February 2006 the bank elected to keep its shares in The Israel Corporation and sell the other two. In practice, it has until March 2008 to sell its 10% interest in Migdal, which is worth about NIS 750 million.

After the bank sold its stock in Africa Israel, for NIS 1.1 billion, shares in that real estate company soared roughly threefold, in what must have been a painful lost opportunity for CEO Galia Maor and other executives with profit-driven bonuses.

	CEO Galia Maor